SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 2, 2001
Commission file number 0-4769
DOLLAR GENERAL CORPORATION
(Exact name of Registrant as Specified in its Charter)
TENNESSEE 61-0502302
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 MISSION RIDGE
GOODLETTSVILE, TN 37072
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (615) 855-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of the Exchange on
Title of Class which Registered
-------------- ----------------
Common Stock New York Stock Exchange
Series B Junior Participating New York Stock Exchange
Preferred Stock Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ X ] Note: The Company did
not timely file its Annual Report on Form 10-K for fiscal 2000 and its quarterly
reports on Form 10-Q for the first three quarters of fiscal 2001 as a result of
the restatement of the Company's financial statements described herein. Such
Annual Report on Form 10-K is filed herewith, and such quarterly reports on Form
10-Q are being filed on the date hereof.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates
of the Registrant as of December 14, 2001, was $3,935,877,699, based upon the
last reported sale price on such date by the New York Stock Exchange.
The number of shares of common stock outstanding on December 14,
2001, was 332,577,284.
Documents Incorporated by Reference
Not applicable
2
The following text contains references to years 2002, 2001, 2000,
1999, 1998, 1997 and 1996, which represent fiscal years ending or ended January
31, 2003, February 1, 2002, February 2, 2001, January 28, 2000, January 29,
1999, January 30, 1998, and January 31, 1997, respectively. This discussion and
analysis should be read with, and is qualified in its entirety by the
consolidated financial statements and the notes thereto.
PART I
ITEM 1. BUSINESS
General
Dollar General Corporation (the "Company" or "Dollar General") is
a leading discount retailer of quality general merchandise at everyday low
prices. Through conveniently located stores, the Company offers a focused
assortment of consumable basic merchandise including health and beauty aids,
packaged food products, home cleaning supplies, housewares, stationery, seasonal
goods, basic clothing and domestics. Dollar General stores serve primarily low-,
middle- and fixed-income families.
The Company opened its first store in 1955, in which year the
Company was first incorporated as a Kentucky corporation under the name J.L.
Turner & Son, Inc. The Company changed its name to Dollar General Corporation in
1968, and reincorporated as a Tennessee corporation in 1998. As of February 2,
2001, the Company operated 5,000 stores located in 25 states, primarily in the
southeastern and midwestern United States. As of December 14, 2001, the Company
operated 5,562 stores in 27 states.
Recent Developments
Restatement of Financial Statements. On April 30, 2001, the
Company announced that it had become aware of certain accounting issues that
would cause it to restate its audited financial statements for fiscal years 1999
and 1998, and to restate the unaudited financial information for the fiscal year
2000 that had been previously released by the Company. The Audit Committee of
the Board of Directors promptly assumed oversight of the Company's response to
these issues and commenced an independent review to prepare the Committee for
its role in reviewing the restated financial statements, assisted by the law
firm of Dechert, Price and Rhoads and the independent accounting firm Arthur
Andersen, LLP. The Company further announced on June 7, 2001, that its Chairman
and Chief Executive Officer had directed the Company's financial staff and its
outside professional consultants to review the Company's reporting, record
keeping, accounting and internal control policies and practices, and that until
such review had been concluded, the Company would not be in a position to update
its prior financial guidance. The Company's financial staff conducted its review
of these issues with the
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assistance of the Company's outside counsel, Debevoise & Plimpton, and
accounting consultants from KPMG LLP.
Consistent with the activities of the Audit Committee and the
Company's review of its financial statements for the 1998, 1999 and 2000 fiscal
years, the Company is restating by means of this filing its audited financial
statements for fiscal years 1999 and 1998, and is filing herewith its audited
financial results for fiscal year 2000, which restate the unaudited financial
information for the fiscal year 2000 that had been previously released by the
Company. The Company's previously released financial data should not be relied
upon.
Restated net income and diluted earnings per share for 2000 are
$70.6 million and $0.21, respectively, as compared to the $206.0 million and
$0.62 previously reported. The restated results for 2000 include a pre-tax
expense of $162.0 million to settle the Company's restatement-related litigation
described below. Excluding the litigation settlement expense, restated net
income and diluted earnings per share for 2000 are $169.6 million and $0.51,
respectively. Restated net income totaled $186.7 million in fiscal 1999 and
$150.9 million in fiscal 1998, equaling diluted earnings per share of $0.55 and
$0.45, respectively. The Company originally reported, prior to the restatement,
net income of $219.4 million in fiscal 1999 and $182.0 million in fiscal 1998,
equaling diluted earnings per share for those periods of $0.65 and $0.54,
respectively.
In its April 30, 2001 announcement, based on a preliminary
assessment of the accounting issues involved, the Company estimated that the
reduction in aggregate earnings as a result of the restatement would be
approximately $0.07 per share over the three-year period of 2000, 1999 and 1998.
The review completed by the Company of its financial statements ultimately
identified a number of accounting issues for restatement in addition to those
that formed the basis for the preliminary estimate provided on April 30, 2001.
As a result of these additional issues, and following the completion of the
Company's review of the issues that had been identified originally, the
restatement has resulted in an aggregate effect on diluted earnings per share,
excluding the litigation settlement expense, of $0.30 over the three-year period
of 2000, 1999 and 1998.
The issues for restatement, excluding the litigation settlement
expense, can be broken down into four general categories: (i) items impacting
the cost of goods sold that were recorded incorrectly and/or that reflect more
accurate estimates, (ii) selling, general and administrative ("SG&A") expenses
that were either incurred but not accrued, or recorded incorrectly, (iii)
additional interest expense required as a result of restating certain operating
leases as capital leases and financing obligations, and the addition of capital
lease and financing obligation liabilities to the Company's balance sheets, and
(iv) changes to the Company's income tax provision to correct errors. The
effects of these issues on diluted earnings per share over the three-year period
are summarized in the following table:
4
Year Ended
---------------------------------------------
Adjustments to diluted earnings per share*: 3 Year February 2, January 28, January 29,
Cumulative 2001 2000 1999
Cost of goods sold $ (0.05) $ (0.01) $ (0.01) $ (0.03)
Selling, general & (0.11) (0.02) (0.05) (0.04)
administrative expenses
Interest expense (0.11) (0.06) (0.04) (0.01)
Tax provision (0.02) (0.01) (0.00) (0.01)
---------- ---------- ---------- ----------
$ (0.30) $ (0.11) $ (0.10) $ (0.09)
========== ========== ========== ==========
*Totals may not foot due to rounding; excludes litigation settlement expense.
Although the issues for restatement in total had a negative
aggregate impact on earnings per share over the three-year period, some of the
issues resulted in an increase in diluted earnings per share, while others
affected diluted earnings in individual years but had no impact on aggregate
diluted earnings per share over the three-year period.
In addition to the restatement of the Company's results of
operations, the correction of many of these issues also required an adjustment
to the Company's previously reported balance sheets. Please refer to Note 2 to
the Consolidated Financial Statements for a schedule reconciling the various
restatement-related adjustments with previously released data for 2000, 1999 and
1998.
Restatement-Related Proceedings. Following the April 30, 2001,
announcement discussed above, more than 20 purported class action lawsuits
were filed against the Company and certain current and former officers and
directors of the Company, asserting claims under the federal securities laws.
These lawsuits have been consolidated into a single action pending in the United
States District Court for the Middle District of Tennessee. On July 17, 2001,
the court entered an order appointing the Florida State Board of Administration
and the Teachers' Retirement System of Louisiana as lead plaintiffs and the law
firms of Entwistle & Cappucci LLP; Milberg Weiss Bershad Hynes & Lerach LLP; and
Grant & Eisenhofer, P.A. as co-lead counsel. On January 3, 2002, the lead
plaintiffs filed an amended consolidated class action complaint purporting to
name as plaintiffs a class of persons who held or purchased the Company's
securities and related derivative securities between May 12, 1998, and September
21, 2001. Among other things, plaintiffs have alleged that the Company and
certain of its current and former officers and directors made misrepresentations
concerning the Company's financial results in the Company's filings with the
Securities and Exchange Commission and in various press releases and other
public statements. The plaintiffs seek damages with interest, costs and such
other relief as the court deems proper.
The Company has reached a settlement agreement with the purported
class action plaintiffs, pursuant to which the Company has agreed to pay $140
million to such plaintiffs in settlement for their claims, and to implement
certain enhancements to its corporate governance and internal control
procedures. Such agreement is subject to confirmatory discovery, to the final
approval of the Company's Board of Directors, and to court approval.
5
Following the completion of confirmatory discovery, plaintiffs have the right
under the settlement agreement to amend their complaint further to increase the
size of the class, and to negotiate with the Company for additional damages, the
aggregate amount of all damages to be paid in settlement of plaintiffs' claims
not to exceed $162 million. The Company expects that following the completion of
such confirmatory discovery, the plaintiffs will amend their complaint and seek
aggregate damages of $162 million. The Company has accordingly recognized an
expense of $162 million in the fourth quarter of 2000. The Company expects to
receive from its insurers approximately $4.5 million in respect of the class
action settlement, which amount has not been accrued in the Company's financial
statements.
In addition, six purported shareholder derivative lawsuits have
been filed in Tennessee State Court against certain current and former Company
directors and officers and Deloitte & Touche LLP, the Company's former
independent accountant. The Company is named as a nominal defendant in the
actions, which seek restitution and/or compensatory and punitive damages with
interest, equitable and/or injunctive relief, costs and such further relief as
the court deems proper. By order entered October 31, 2001, the court appointed
Michael Dixon, Jr., Carolinas Electrical Workers Retirement Fund and Thomas
Dewey, plaintiffs in one of the six filed cases, as lead plaintiffs and the law
firms of Branstetter, Kilgore Stranch & Jennings, and Stanley, Mandel & Iola as
lead counsel. In the same order, the court stayed the remaining cases pending
completion of the lead case. Among other things, the plaintiffs allege that
certain current and former Company directors and officers breached their
fiduciary duties to the Company and that Deloitte & Touche aided and abetted
those breaches and was negligent in its service as the Company's independent
accountant. During August and September 2001, the Company moved to dismiss all
six cases for failure to make a pre-suit demand on the Board of Directors and,
in the alternative, requested that the court stay the actions pending the
completion of an investigation into the allegations in the complaints by the
Shareholder Derivative Claim Review Committee of the Company's Board of
Directors. The lead plaintiffs filed an opposition to this motion on October 2,
2001. A hearing on the motion has not yet been scheduled.
Two purported shareholder derivative lawsuits also have been
filed in the United States District Court for the Middle District of Tennessee
against certain current and former Company directors and officers alleging that
they breached their fiduciary duties to the Company. The Company is named as a
nominal defendant in these actions, which seek declaratory relief, compensatory
and punitive damages, costs and such further relief as the court deems proper.
By motion filed on September 28, 2001, the Company requested that the federal
court abstain from exercising jurisdiction over the purported shareholder
derivative actions in deference to the pending state court actions. By agreement
of the parties and court order dated December 3, 2001, the case has been stayed
until June 3, 2002.
6
The Company and the individual defendants have reached a
settlement agreement with lead counsel to the plaintiffs in the lead Tennessee
state shareholder derivative action. The agreement includes a payment to the
Company from a portion of the proceeds of the Company's director and officer
liability insurance policies as well as certain corporate governance and
internal control enhancements. Pursuant to the terms of such agreement, the
Company anticipates that all of the stayed cases, including the federal
derivative cases described above, will be dismissed with prejudice by the courts
in which they are pending. Such agreement is subject to confirmatory discovery,
to the final approval of the Company's Board of Directors, and to court
approval. If the settlement agreement is approved, the Company expects that it
will result in a net payment to the Company, after attorneys' fees payable to
the plaintiffs' counsel, of approximately $24.8 million, which has not been
accrued in the Company's financial statements.
The Company believes that it has substantial defenses to the
purported class action and the derivative lawsuits and intends to assert these
defenses in the courts in which the actions are pending in the event the
settlement agreements referred to above do not successfully resolve these
matters. These cases are at an early stage and the amount of potential loss, if
any, should the settlement agreements not become effective cannot be reasonably
estimated. An unfavorable outcome for the Company in these actions could have a
material adverse impact on the Company's financial position and results of
operations.
The Company has been notified that the SEC is conducting an
investigation into the circumstances that gave rise to the Company's April 30,
2001 announcement. The Company is cooperating with this investigation by
providing documents and other information to the SEC.
Overall Business Strategy
Dollar General's mission statement is "A Better Life for
Everyone!" To carry out this mission, the Company has developed a business
strategy that focuses on providing its customers with a focused assortment of
consumable basic merchandise in a convenient, small-store format.
Our Customers. The Company serves the consumable basics needs of
customers primarily in the low- and middle-income brackets, and customers on
fixed incomes. Research performed by an outside service on behalf of the Company
in the Spring of 2001 indicated that approximately 55% of its customers live in
households earning less than $30,000 a year, and approximately 36% earn less
than $20,000. The Company's merchandising and operating strategies are designed
to meet the consumable basics needs of the consumers in this group.
7
Our Stores. The average Dollar General store has approximately
6,700 selling square feet and serves customers whose homes are usually located
within three to five miles of the store. Most stores are in small towns with
populations of fewer than 20,000. The Company believes that its target customers
prefer the convenience of a small, neighborhood store. As the discount store
industry continues to move toward larger, "super-center" type stores, which are
often built outside of towns, the Company believes that Dollar General's
convenient discount store format will continue to attract customers and provide
the Company with a competitive advantage.
Our Merchandise. The Company is committed to offering a focused
assortment of quality, consumable basic merchandise in a number of core
categories, such as health and beauty aids, packaged food products, home
cleaning supplies, housewares, stationery, seasonal goods, basic apparel and
domestics. Because the Company offers a focused assortment of consumable basic
merchandise, customers are able to shop at Dollar General stores for their
everyday household needs. In 2000, the average customer transaction was $8.27.
Our Prices. The Company distributes quality, consumable basic
merchandise at everyday low prices. The Company's strategy of a low-cost
operating structure and a focused assortment of merchandise is designed to allow
the Company to offer quality merchandise at highly competitive prices. As part
of this strategy, the Company emphasizes even-dollar price points. The majority
of the Company's products are priced at $10 or less, with approximately 33% of
the products priced at $1 or less. The most expensive items are generally priced
around $35.
Our Cost Controls. The Company places an emphasis on aggressively
managing its overhead cost structure. Additionally, the Company seeks to locate
stores in neighborhoods where rental and operating costs are low. The Company
attempts to control operating costs by implementing new technology where
feasible. Examples of this strategy in fiscal 2000 and 2001 include new IBM
registers designed to capture payroll information and monitor employee
productivity, new handheld store inventory ordering technology which should
result in lower inventory handling and carrying costs, and the introduction of a
new sales audit product which identifies register procedure violations by
providing transactional information about cashier activities.
Growth Strategy
The Company has experienced a rapid rate of expansion in recent
years, increasing its number of stores from 2,059 as of January 31, 1995, to
5,562 as of December 14, 2001. In addition to growth from new store openings,
the Company recorded same-store sales increases of 0.9%, 6.4% and 8.3% in 2000,
1999 and 1998, respectively. Management will continue to seek to grow the
Company's business. The
8
Company believes this growth will come from a combination of new store openings,
infrastructure investments and merchandising initiatives.
New Store Growth. Management believes that the Company's
convenient, small-store format is adaptable to small towns and neighborhoods
throughout the country. The Company currently serves more than 3,000 communities
with populations of fewer than 20,000. The Company intends to continue to focus
on small towns and neighborhoods within its existing market area where
management believes the Company has the potential to expand its store base. By
opening new stores in its existing market area, the Company takes advantage of
brand awareness and maximizes its operating efficiencies.
In addition, the Company expects to explore the potential for
expansion into new geographic markets as opportunities present themselves.
Specifically, in 2001 the Company opened its first stores in New York and New
Jersey. As of December 14, 2001, the Company had 49 stores in New York, and
eight stores in New Jersey. Consistent with its strategy, the Company is
focusing its efforts in these states on small communities.
In 2000, 1999 and 1998, the Company opened 758, 646 and 551 new
stores, and remodeled or relocated 237, 409 and 351 stores, respectively. In
2001, the Company currently plans to open approximately 600 new stores, close 50
to 60 stores, and remodel or relocate approximately 70 stores.
Infrastructure Investments. In recent years, the Company has made
significant investments in its distribution network and management information
systems. In August 2000, the Company opened a 1.0 million square-foot
distribution center ("DC") in Alachua, Florida, and in April 2001, the Company
opened a 1.2 million square-foot DC in Zanesville, Ohio. Subsequent to the DC
opening in Alachua, Florida the Company closed a DC in Homerville, Georgia. In
addition, the Company closed a DC in Villa Rica, Georgia that had only served
new stores. As a result of these openings and closings, the Company has seven
distribution centers located throughout the southeastern and midwestern United
States. Of these seven DCs, four were opened between 1998 and 2001 - Alachua,
Florida; Zanesville, Ohio; Indianola, Mississippi; and Fulton, Missouri. The
remaining three DCs are located in Ardmore, Oklahoma; Scottsville, Kentucky;
and South Boston, Virginia. These significant investments in distribution were
the result of the Company's strategy to reduce transportation expenses and
effectively support the Company's growth. Each DC, on average, services 800
stores with an average distance per delivery of approximately 220 miles.
Recent investments in technology include a new merchandise
planning system designed to assist our merchants with their purchasing and store
allocation decisions (2001 and 2002); satellite technology that provides faster
check authorization and improves communications between the stores and the
corporate office (2001 and 2002); new handheld store-ordering technology to
improve the accuracy of store orders (2000 and 2001); new flatbed scanners to
increase checkout speed and scanning accuracy (2000); new IBM registers that
capture payroll data and monitor employee productivity (2000, 2001 and 2002);
9
an automated distribution center replenishment system to reduce inventory safety
stocks (2000); and the introduction of the Manugistics transportation management
system, which optimizes truck routes and backhaul opportunities (1998 and 1999).
Merchandising Initiatives. The Company's merchandising
initiatives are designed to promote same-store sales increases. In 2000, the
Company modified its merchandise mix by discontinuing approximately 850
slow-performing items and adding approximately 600 new items. The Company also
added soft drink coolers in all of its stores and continued to introduce
promotional items, representing less than 5% of total net sales in 2000. The
Company will continue to evaluate the performance of its merchandise mix and
make changes where appropriate.
Merchandise
Dollar General stores offer a focused assortment of quality,
consumable basic merchandise in a number of core categories. The Company
separates its merchandise into the following four divisions for internal
reporting purposes: (1) highly consumable, (2) hardware and seasonal, (3) basic
clothing, and (4) home products.
Since 1997, the Company has increased its emphasis on the highly
consumable division by adding items in the food, paper, household chemicals, and
health and beauty care categories. During the same period, the Company has
reduced its emphasis on the home products division by eliminating items such as
bath mats, area rugs and bath towels. In 1998, the Company introduced
approximately 400 new stock-keeping units ("SKUs") of family-oriented, basic
apparel including items such as jeans, khakis, T-shirts and knit shirts for men,
women and children at prices of $10 or less. As of December 14, 2001, the
Company continues to carry approximately half of those SKUs, which the Company
considers a part of its core apparel program.
The percentage of total sales of each of the four divisions
tracked by the Company is as follows: in 2000 total sales consisted of 55.3%
highly consumables, 15.5% hardware and seasonal, 12.2% basic clothing and 17.0%
home products; in 1999 total sales consisted of 51.3% highly consumables, 16.5%
hardware and seasonal, 12.4% basic clothing and 19.8% home products; and in 1998
total sales consisted of 42.3% highly consumables, 18.8% hardware and seasonal,
12.2% basic clothing and 26.7% home products. Of the four divisions, the
hardware and seasonal division typically records the highest gross profit rate
and the highly consumables division typically records the lowest gross profit
rate.
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The Company purchases its merchandise from a wide variety of
suppliers. No supplier accounted for more than 13% of the Company's purchases in
2000. Approximately 12% of the Company's purchases in 2000 were imported.
The Company does not run weekly advertising circulars but does
advertise to support new store openings. Advertising expenses are less than 1%
of sales.
The Company maintains approximately 3,500 core SKUs per store.
The Company's average customer purchase in 2000 was $8.27. The average number of
items in each customer purchase was 5.8, and the average price of each purchased
item was $1.42.
As indicated in Note 4 to the Consolidated Financial Statements,
the Company believes that it has certain excess inventory that will require a
markdown to assist with its disposition. Accordingly, the Company recorded a
markdown which had the impact of reducing inventory at cost at February 2, 2001,
and increasing cost of goods sold in the fourth quarter of 2000 by approximately
$21.5 million. The Company believes that this markdown will be adequate to
ensure the sale of the excess inventory during fiscal years 2001 and 2002.
However, there can be no assurance that the Company will be able to sell all of
this inventory by the end of 2002 without a further markdown. The Company moved
$116.0 million of inventory out of current assets at February 2, 2001, that it
does not expect to sell during 2001.
The Company's business is modestly seasonal in nature. The only
extended seasonal increase in business that the Company experiences is the
Christmas selling season. During the Christmas selling season, the Company
carries merchandise that it does not carry during the rest of the year such as
gift sets, trim-a-tree, certain baking items, and a broader assortment of toys
and candy. In 2000, 1999 and 1998 the fourth quarter generated 32%, 30% and 31%
of the Company's total annual revenues, respectively. Although all four of the
Company's divisions experienced their highest sales in the fourth quarter, the
hardware and seasonal division had the largest increases.
The Dollar General Store
The typical Dollar General store has approximately 6,700 square
feet of selling space and is operated by a manager, an assistant manager and two
or more sales clerks. Most stores are in small towns with populations of fewer
than 20,000. As of December 14, 2001, approximately 58% of stores were located
in strip shopping centers, 38% were freestanding buildings and less than 4% were
in downtown store buildings. The Company generally has not encountered
difficulty locating suitable store sites in the past, and management does not
currently anticipate experiencing material difficulty in finding suitable
locations at favorable rents.
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The Company's recent store growth is summarized in the following
table:
Stores at Net
Beginning Stores Stores Store Stores at
Year of Year Opened Closed Increase Year End
--------------------------------------------------------------------------------
1998 3,169 551 33 518 3,687
1999 3,687 646 39 607 4,294
2000 4,294 758 52 706 5,000
In 2001, the Company currently plans to open approximately 600
new stores, close 50 to 60 stores, and remodel or relocate approximately 70
stores. As of December 14, 2001, the Company operated 5,562 retail stores.
Employees
As of February 2, 2001, the Company and its subsidiaries employed
approximately 39,500 full-time and part-time employees, including divisional and
regional managers, area managers, store managers, and DC and administrative
personnel, compared with approximately 34,600 employees on January 28, 2000. The
Company had approximately 45,000 employees, excluding temporary Christmas help,
as of December 14, 2001. Management believes the Company's relationship with its
employees is good.
Competition
The Company is engaged in a highly competitive business. The
Company competes with discount stores and with many other retailers, including
mass merchandise, grocery, drug, convenience, variety and other specialty
stores. Some of the nation's largest retail companies operate stores in areas
where the Company operates. The Company's direct competitors in the dollar store
retail categories include Family Dollar, Dollar Tree, Fred's and various local,
independent operators. Competitors from other retail categories include CVS,
Rite Aid, Walgreens, Eckerds, Wal-Mart and Kmart. Some of the Company's
competitors from outside the dollar store segment are better capitalized than
the Company.
The dollar store category differentiates itself from other forms
of retailing by offering consistently low prices in a convenient, small-store
format. Recently conducted independent research indicates that the average
dollar store customer visits a store approximately 90 times each year. The
Company's prices are competitive because of its low cost operating structure and
the relatively limited assortment of products offered. Labor and marketing
expenses are minimized by not using circulars, limiting price points and
relying on simple merchandise presentation. Occupancy expenses are typically low
because the Company attempts to locate in second tier locations, either in small
towns or in the neighborhoods of more urban areas where such expenses are low.
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The Company believes that its limited assortment of products allows it to focus
its purchasing efforts on fewer SKUs than other retailers, which helps keep the
cost of goods low.
ITEM 2. PROPERTIES
As of February 2, 2001, the Company operated 5,000 retail stores
located in 25 states. As of December 14, 2001, the Company operated 5,562 retail
stores located in 27 states, as follows:
State Number of Stores State Number of Stores
--------------------------------------------------------------------------------
Alabama 264 Missouri 256
Arkansas 192 Nebraska 60
Delaware 19 New Jersey 8
Florida 320 New York 49
Georgia 308 North Carolina 286
Illinois 239 Ohio 302
Indiana 240 Oklahoma 224
Iowa 125 Pennsylvania 284
Kansas 140 South Carolina 202
Kentucky 236 Tennessee 312
Louisiana 193 Texas 715
Maryland 56 Virginia 216
Michigan 54 West Virginia 110
Mississippi 152
Substantially, all of the Company's stores are located in leased
premises. Individual store leases vary as to their terms, rental provisions and
expiration dates. In 2000, the Company's aggregate store rental expense averaged
$4.77 per square foot of selling space. The Company's policy is to negotiate
low-cost, short-term leases (usually with initial or primary terms of three to
five years) with multiple renewal options when available.
The Company's DCs serve Dollar General stores as described in the
following table:
As of December 14, 2001
----------------------- Approximate
Year Approximate Square Number of Stores
Location Opened Footage Served
-------------------------------------------------------------------------------
Scottsville, Kentucky 1959 720,000 814
Ardmore, Oklahoma 1994 1,200,000 972
South Boston, Virginia 1997 1,210,000 915
Indianola, Mississippi 1998 820,000 618
Fulton, Missouri 1999 1,150,000 793
Alachua, Florida 2000 980,000 714
Zanesville, Ohio 2001 1,170,000 736
-------------------------------------------------------------------------------
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The Company owns the DC located in Scottsville, Kentucky and
leases all of its other DCs. The Company opened its Zanesville, Ohio DC in April
of 2001. The Company's executive offices are located in approximately 302,000
square feet of leased space in Goodlettsville, Tennessee.
ITEM 3. LEGAL PROCEEDINGS
Restatement-Related Proceedings
Following the April 30, 2001, announcement discussed above, more
than 20 purported class action lawsuits were filed against the Company and
certain current and former officers and directors of the Company, asserting
claims under the federal securities laws. These lawsuits have been consolidated
into a single action pending in the United States District Court for the Middle
District of Tennessee. On July 17, 2001, the court entered an order appointing
the Florida State Board of Administration and the Teachers' Retirement System of
Louisiana as lead plaintiffs and the law firms of Entwistle & Cappucci LLP,
Milberg Weiss Bershad Hynes & Lerach LLP and Grant & Eisenhofer, P.A. as co-lead
counsel. On January 3, 2002, the lead plaintiffs filed an amended consolidated
class action complaint purporting to name as plaintiffs a class of persons who
held or purchased the Company's securities and related derivative securities
between May 12, 1998, and September 21, 2001. Among other things, plaintiffs
have alleged that the Company and certain of its current and former officers and
directors made misrepresentations concerning the Company's financial results in
the Company's filings with the Securities and Exchange Commission and in various
press releases and other public statements. The plaintiffs seek damages with
interest, costs and such other relief as the court deems proper.
The Company has reached a settlement agreement with the purported
class action plaintiffs, pursuant to which the Company has agreed to pay $140
million to such plaintiffs in settlement for their claims, and to implement
certain enhancements to its corporate governance and internal control
procedures. Such agreement is subject to confirmatory discovery, to the final
approval of the Company's Board of Directors, and to court approval. Following
the completion of confirmatory discovery, plaintiffs have the right under the
settlement agreement to amend their complaint further to increase the size of
the class, and to negotiate with the Company for additional damages, the
aggregate amount of all damages to be paid in settlement of plaintiffs' claims
not to exceed $162 million. The Company expects that following the completion of
such confirmatory discovery, the plaintiffs will amend their complaint and seek
aggregate damages of $162 million. The Company has accordingly recognized an
expense of $162 million in the fourth quarter of 2000. The Company expects to
receive from its insurers approximately $4.5 million in respect of the class
action settlement, which amount has not been accrued in the Company's financial
statements.
14
In addition, six purported shareholder derivative lawsuits have
been filed in Tennessee State Court against certain current and former Company
directors and officers and Deloitte & Touche LLP, the Company's former
independent accountant. The Company is named as a nominal defendant in the
actions, which seek restitution and/or compensatory and punitive damages with
interest, equitable and/or injunctive relief, costs and such further relief as
the court deems proper. By order entered October 31, 2001, the court appointed
Michael Dixon, Jr., Carolinas Electrical Workers Retirement Fund and Thomas
Dewey, plaintiffs in one of the six filed cases, as lead plaintiffs and the law
firms of Branstetter, Kilgore Stranch & Jennings and Stanley, Mandel & Iola as
lead counsel. In the same order, the court stayed the remaining cases pending
completion of the lead case. Among other things, the plaintiffs allege that
certain current and former Company directors and officers breached their
fiduciary duties to the Company and that Deloitte & Touche aided and abetted
those breaches and was negligent in its service as the Company's independent
accountant. During August and September 2001, the Company moved to dismiss all
six cases for failure to make a pre-suit demand on the Board of Directors and,
in the alternative, requested that the court stay the actions pending the
completion of an investigation into the allegations in the complaints by the
Shareholder Derivative Claim Review Committee of the Company's Board of
Directors. The lead plaintiffs filed an opposition to this motion on October 2,
2001. A hearing on the motion has not yet been scheduled.
Two purported shareholder derivative lawsuits also have been
filed in the United States District Court for the Middle District of Tennessee
against certain current and former Company directors and officers alleging that
they breached their fiduciary duties to the Company. The Company is named as a
nominal defendant in these actions, which seek declaratory relief, compensatory
and punitive damages, costs and such further relief as the court deems proper.
By motion filed on September 28, 2001, the Company requested that the federal
court abstain from exercising jurisdiction over the purported shareholder
derivative actions in deference to the pending state court actions. By agreement
of the parties and court order dated December 3, 2001, the case has been stayed
until June 3, 2002.
The Company and the individual defendants have reached a
settlement agreement with lead counsel to the plaintiffs in the lead Tennessee
state shareholder derivative action. The agreement includes a payment to the
Company from a portion of the proceeds of the Company's director and officer
liability insurance policies as well as certain corporate governance and
internal control enhancements. Pursuant to the terms of such agreement, the
Company anticipates that all of the stayed cases, including the federal
derivative cases described above, will be dismissed with prejudice by the courts
in which they are pending. Such agreement is subject to confirmatory discovery,
to the final approval of the Company's Board of Directors, and to court
approval. If the settlement agreement is approved, the Company expects that it
will result in a net payment to the Company, after
15
attorneys' fees payable to the plaintiffs' counsel, of approximately $24.8
million, which has not been accrued in the Company's financial statements.
The Company believes that it has substantial defenses to the
purported class action and the derivative lawsuits and intends to assert these
defenses in the courts in which the actions are pending in the event the
settlement agreements referred to above do not successfully resolve these
matters. These cases are at an early stage and the amount of potential loss, if
any, should the settlement agreements not become effective cannot be reasonably
estimated. An unfavorable outcome for the Company in these actions could have a
material adverse impact on the Company's financial position and results of
operations.
The Company has been notified that the SEC is conducting an
investigation into the circumstances that gave rise to the Company's April 30,
2001, announcement. The Company is cooperating with this investigation by
providing documents and other information to the SEC.
Other Litigation
The Company was involved in other litigation, investigations of a
routine nature and various legal matters during 2000, which were and are being
defended and otherwise handled in the ordinary course of business. While the
ultimate results of these matters cannot be determined or predicted, management
believes that they have not had and will not have a material adverse effect on
the Company's results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the quarter
ended February 2, 2001, or during the first three quarters of fiscal year 2001.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's common stock is traded on the New York Stock
Exchange under the symbol "DG." The following table sets forth the range of the
high and low closing prices of the Company's common stock during each quarter in
2000 and 1999, as reported on the New York Stock Exchange, together with
dividends. All numbers have been restated to reflect common stock splits.
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------
High $ 21.80 $ 21.44 $ 23.06 $ 19.81
Low $ 14.65 $ 16.31 $ 14.75 $ 13.50
Dividends $ .026 $ .032 $ .032 $ .032
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------
High $ 23.68 $ 24.65 $ 25.80 $ 21.70
Low $ 15.84 $ 21.20 $ 18.60 $ 16.65
Dividends $ .021 $ .026 $ .026 $ .026
The Company's stock price at the close of the market on December
14, 2001, was $13.90.
There were approximately 12,400 shareholders of record of the
Company's common stock as of December 14, 2001. The Company has paid cash
dividends on its common stock since 1975. The Board of Directors regularly
reviews the Company's dividend plans to ensure that they are consistent with the
Company's earnings performance, financial condition, need for capital and other
relevant factors. The Company did not sell any of its equity securities during
2000 without registration under the Securities Act of 1933, as amended.
17
ITEM 6. SELECTED FINANCIAL DATA*
(In thousands except per share and operating data, as restated)
February 2, 2001
(53-week year) January 28, 2000 January 29, 1999
-----------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS:
Net sales $ 4,550,571 $ 3,887,964 $ 3,220,989
Gross profit $ 1,250,903 $ 1,093,498 $ 892,519
Litigation settlement expense $ 162,000
Income before income taxes $ 108,647 $ 294,697 $ 239,009
Net income $ 70,642 $ 186,673 $ 150,934
Net income as a % of sales 1.6% 4.8% 4.7%
-----------------------------------------------------------------------------------------------------------
PER SHARE RESULTS:
Diluted earnings per share (a) $ 0.21 $ 0.55 $ 0.45
Basic earnings per share (a) $ 0.21 $ 0.61 $ 0.53
-----------------------------------------------------------------------------------------------------------
Cash dividends per share of common stock (a) $ 0.12 $ 0.10 $ 0.08
Weighted average diluted shares (a) 333,858 337,904 335,763
-----------------------------------------------------------------------------------------------------------
FINANCIAL POSITION:
Assets $ 2,282,462 $ 1,923,628 $ 1,376,012
Long-term obligations $ 720,764 $ 514,362 $ 221,694
Shareholders' equity $ 861,763 $ 845,353 $ 674,406
Return on average assets 3.4% 11.3% 12.9%
Return on average equity 8.3% 24.6% 24.4%
-----------------------------------------------------------------------------------------------------------
OPERATING DATA:
Retail stores at end of period 5,000 4,294 3,687
Year-end selling square feet 33,871,000 28,655,000 23,719,000
Highly consumable sales 55% 51% 42%
Hardware and seasonal sales 16% 17% 19%
Basic clothing sales 12% 12% 12%
Home products sales 17% 20% 27%
-----------------------------------------------------------------------------------------------------------
(a) As adjusted to give retroactive effect to all common stock splits.
* The Company has determined, in light of the substantial time, effort and
expense required since April of 2001 to prepare and audit its restated
financial statements for fiscal 2000, 1999 and 1998, that unreasonable
further effort and expense would be required to conduct a similar process
to restate its previously released financial data for fiscal 1997 and
1996. Such financial data have not been restated and should not be relied
upon. For a further discussion of the Company's restatement of its
financial statements, see Note 2 to the Consolidated Financial Statements.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Accounting Periods. The following text contains references to
years 2001, 2000, 1999 and 1998, which represent fiscal years ending or ended
February 1, 2002, February 2, 2001, January 28, 2000 and January 29, 1999,
respectively. There were 53 weeks in the fiscal year ended February 2, 2001.
There were 52 weeks in the fiscal years ended January 28, 2000 and January 29,
1999. There will be 52 weeks in the fiscal year ended February 1, 2002. This
discussion and analysis should be read with, and is qualified in its entirety
by, the consolidated financial statements and the notes thereto.
Overview of 2000. During 2000, Dollar General increased its net
sales by 17.0%, primarily as a result of its continued rapid pace of new store
openings. From 1998 through 2000, the Company had a compound annual net sales
growth rate of 18.9%. Same-store sales increased 0.9% in 2000, as compared with
increases of 6.4% and 8.3% in 1999 and 1998, respectively.
As discussed further below, management believes that the
Company's operating performance in 2000 was negatively impacted by out-of-stock
conditions resulting from an extensive system-wide store retrofit program and
changes in the store merchandise ordering process. In addition, the Company's
performance may have been impacted by changes in general economic conditions.
The year 2000 marked the thirteenth consecutive year that the
Company increased its total number of store units. The Company opened 758 new
stores in 2000, compared with 646 in 1999 and 551 in 1998, and remodeled or
relocated 237 stores, compared with 409 in 1999 and 351 in 1998. During the last
three years, the Company has opened, remodeled or relocated 2,952 stores,
accounting for approximately 60% of the total stores as of February 2, 2001. The
Company ended fiscal 2000 with 5,000 stores. The Company currently plans to open
approximately 600 new stores and close 50 to 60 stores in 2001, and to remodel
or relocate approximately 70 stores. The Company will continue to focus on
opening new stores in towns with populations of 20,000 or fewer and within 250
miles of its DCs. The Company expects its new stores to be subject to operating
lease arrangements. Capital expenditures related to new store openings will be
financed through a combination of operating cash flow and credit facilities.
In 2000, new stores, remodels and relocations, net of 52 closed
stores, added an aggregate of approximately 5 million selling square feet to the
Company's total sales space. As a result, the Company had an aggregate of
approximately 34 million selling square feet at the end of the year. The average
new store opened in 2000 had approximately 6,900 selling square feet compared to
19
approximately 7,200 selling square feet for new stores opened in 1999.
In 1998, the Company introduced a preferred development program
to support continued new store growth. This program enabled the Company to
partner with development firms to build stores in markets where existing,
acceptable retail space was not available. The Company opened 163 new stores
through this program in 2000, compared with 141 new stores in 1999 and 52 new
stores in 1998. In 2001, as the Company expands into new markets, management
expects to meet store growth needs primarily through conventional leases.
In the third quarter of 2000, the Company opened a new DC with
dual sortation capacity in Alachua, Florida and closed a DC in Homerville,
Georgia. The Company also closed a DC in Villa Rica, Georgia that had been
dedicated to supplying new stores and prepared the existing DCs to support new
store growth in 2001. In 2000, the Company implemented a new inventory
management system and focused on improving inventory processes in all DCs. This
allowed the Company to increase its DC inventory turns from 11 in 1999 to 14 in
2000, a 27% increase. Continuing to support the growing store base and in an
effort to improve distribution efficiencies, the Company opened its seventh DC
in Zanesville, Ohio in April of 2001.
Store investment and infrastructure upgrades were priorities in
2000. New flatbed scanners were installed in all stores, and new IBM registers
and checkouts were installed in approximately 2,600 stores. By the end of 2001,
management expects to have the systems to support perpetual inventories in
approximately 4,800 stores and expects to establish perpetual inventories in
approximately 500 stores. Management expects to have the systems to support
perpetual inventories in all stores by the end of 2002. A perpetual inventory
allows the Company to track store level inventory at the SKU level, which should
result in better inventory management. Additionally, management expects to
enhance store communications and improve customer service by installing
satellite communications technology in 2,500 stores in 2001, and in all stores
by the end of 2002.
Restatement of Financial Statements
On April 30, 2001, the Company announced that it had become aware
of certain accounting issues that would cause it to restate its audited
financial statements for fiscal years 1999 and 1998, and to restate the
unaudited financial information for the fiscal year 2000 that had been
previously released by the Company. The Audit Committee of the Board of
Directors promptly assumed oversight of the Company's response to the accounting
issues and commenced an independent review of these accounting issues to prepare
the Committee for its role in reviewing the restated financial statements,
assisted by the law firm of Dechert, Price and Rhoads and the independent
accounting firm Arthur Andersen, LLP. The Company further announced on June 7,
2001, that its Chairman and Chief Executive Officer had directed the Company's
20
financial staff and its outside professional consultants to review the Company's
reporting, record keeping, accounting and internal control policies and
practices, and that until such review had been concluded, the Company would not
be in a position to update its prior financial guidance. The Company's financial
staff conducted its review of these issues with the assistance of the Company's
outside counsel, Debevoise & Plimpton, and accounting consultants from KPMG LLP.
Consistent with the activities of the Audit Committee and the
Company's review of its financial statements for the 1998, 1999 and 2000 fiscal
years, the Company is restating by means of this filing its audited financial
statements for fiscal years 1999 and 1998, and is filing herewith its audited
financial results for fiscal year 2000, which restate the unaudited financial
information for the fiscal year 2000 that had been previously released by the
Company. The Company's previously released financial data should not be relied
upon.
Restated net income and diluted earnings per share for 2000 are
$70.6 million and $0.21, respectively, as compared to the $206.0 million and
$0.62 previously reported. The restated results for 2000 include a pre-tax
expense of $162.0 million to settle the Company's restatement-related litigation
described below. Excluding the litigation settlement expense, restated net
income and diluted earnings per share for 2000 are $169.6 million and $0.51,
respectively. Restated net income totaled $186.7 million in fiscal 1999 and
$150.9 million in fiscal 1998, equaling diluted earnings per share of $0.55 and
$0.45, respectively. The Company originally reported, prior to the restatement,
net income of $219.4 million in fiscal 1999 and $182.0 million in fiscal 1998,
equaling diluted earnings per share for those periods of $0.65 and $0.54,
respectively.
The issues for restatement, excluding the litigation settlement
expense, can be broken down into four general categories: (i) items impacting
the cost of goods sold that were recorded incorrectly and/or that reflect more
accurate estimates, (ii) selling, general and administrative ("SG&A") expenses
that were either incurred but not accrued, or recorded incorrectly, (iii)
additional interest expense required as a result of restating certain operating
leases as capital leases and financing obligations, and the addition of capital
lease and financing obligation liabilities to the Company's balance sheets, and
(iv) changes to the Company's income tax provision to correct errors.
Set forth below is a more detailed description of the four
general categories of issues identified and corrected and the earnings per share
impact of such items over the three-year period of 2000, 1999 and 1998:
Cost of Goods Sold. The Company has reduced its diluted earnings
per share by $0.05 over the three-year period to correct items impacting the
cost of goods sold that were recorded incorrectly and/or that reflect more
accurate estimates. Examples of items that fall into this category include the
21
provision for inventory shrinkage, certain expenses associated with the
Company's import program, the markdown to facilitate the sale of excess
inventory, certain vendor allowances for new store openings, the accounting
treatment of markdowns to remove damaged merchandise from stock, and a provision
for uncollectible vendor charge backs. The item with the largest impact on the
restatement affecting cost of goods sold is the recalculation of the shrinkage
provision, which reduced diluted earnings per share by $0.04 over the three-year
restatement period. The restatement of cost of goods sold reduced diluted
earnings per share by $0.01, $0.01 and $0.03 in 2000, 1999 and 1998,
respectively.
Selling, General & Administrative Expenses. The Company has
reduced its diluted earnings per share by $0.11 over the three-year period to
record correctly expenses that were either incurred but not accrued, or recorded
incorrectly. Prior to this restatement, the Company recorded certain expenses
when it processed payment as opposed to when the activity was actually
undertaken. Expense items that fall into this category reduced diluted earnings
per share by $0.02 over the three-year period and include, among other items,
property taxes, rent, supplies, trash removal, advertising costs, maintenance
costs and utilities. A partial list of expenses that were recorded incorrectly
includes the depreciation expense on certain older cash registers, the rent and
depreciation expense associated with certain leases restated from operating
lease classification to capital lease classification, certain store labor costs
and supplies that were capitalized when they should have been expensed, the
impairment of a closed distribution center, compensation expense related to the
use of stock options for excess tax withholding, and various expenses that were
charged against unrelated liability accounts as opposed to being categorized as
SG&A expenses. The restatement of SG&A expenses reduced diluted earnings per
share by $0.02, $0.05 and $0.04 in 2000, 1999 and 1998, respectively.
Interest Expense. The Company has reduced its diluted earnings
per share by $0.11 over the three-year period to correctly record additional
interest expense required as a result of restating certain operating leases as
capital leases or as financing obligations. As part of the restatement process,
the Company examined its accounting practices with regard to certain synthetic
lease facilities entered into in 1997 and 1999 with respect to its use and
occupancy of certain real property, including approximately 400 stores, two of
the Company's distribution centers and the Company's corporate headquarters in
Goodlettsville, Tennessee. The Company determined that the synthetic leases did
not meet the Statement of Financial Accounting Standards ("SFAS") No. 13
requirements for operating lease treatment due primarily to the current
assumption that the Company would incur a penalty, as defined in SFAS No. 98, if
it did not renew the leases. Additionally, the Company identified four
sale-leaseback transactions that were incorrectly classified exclusively as
operating leases. Two of these transactions have now been recorded as financing
obligations, while the equipment portion of the other two transactions have been
accounted for as capital leases. Increases in interest expense as a result of
the various lease
22
classification changes reduced diluted earnings per share by $0.06, $0.04 and
$0.01 in 2000, 1999 and 1998, respectively. As of February 2, 2001, January 28,
2000, and January 29, 1999, the Company added various long-term obligations to
its consolidated balance sheets of $511.0 million, $513.8 million, and $175.7
million, respectively.
Tax Provision. The Company has reduced its diluted earnings per
share by $0.02 over the three-year period to correct errors in the Company's tax
provision. The Company's effective tax rate before the restatement was 36.2% in
2000, 36.2% in 1999, and 35.2% in 1998. The Company's effective tax rate on a
restated basis, excluding the impact of the litigation settlement expense, is
37.3% in 2000, 36.7% in 1999 and 36.9% in 1998. Issues contributing to the
increase in the effective tax rate include a change in the calculation of the
Company's deferred tax liability from a consolidated calculation to a
calculation by individual entity in accordance with SFAS No. 109; a change in
the computation of the income tax benefit allocated to additional paid-in
capital related to the exercise of non-qualified stock options; the correction
of a duplicate deduction related to inventory on a prior income tax return; the
correction of the Company's current income tax liability which had been
improperly reduced for amounts paid relating to professional fees, interest and
certain penalties; and increases to income tax-related accrued liabilities. The
restatement of the Company's income tax provision reduced diluted earnings per
share, excluding the impact of the litigation settlement expense, by $0.01 in
2000 and $0.01 in 1998. A tax rate of 38.9% was applied in 2000 against the
$162.0 million litigation settlement expense. Including the impact of the
litigation settlement expense, the restated effective tax rate in 2000 was
35.0%.
In addition to the restatement of diluted earnings per share, the
correction of many of these issues also required an adjustment to previously
reported balance sheets. Please refer to Note 2 to the Consolidated Financial
Statements for a schedule reconciling the various restatement-related
adjustments with previously released data for 2000, 1999 and 1998.
Critical Accounting Policies
As discussed in Note 1 to the Consolidated Financial Statements,
inventories are stated at the lower of cost or market with cost determined using
the retail last-in, first-out ("LIFO") method. Under the retail inventory method
("RIM"), the valuation of inventories at cost and the resulting gross margins
are calculated by applying a calculated cost-to retail ratio to the retail value
of inventories. RIM is an averaging method that has been widely used in the
retail industry due to its practicality. Also, it is recognized that the use of
the retail inventory method will result in valuing inventories at lower of cost
or market if markdowns are currently taken as a reduction of the retail value of
inventories.
23
Inherent in the RIM calculation are certain significant
management judgments and estimates including, among others, merchandise markon,
markups, markdowns and shrinkage, which significantly impact the ending
inventory valuation at cost as well as resulting gross margins. These
significant estimates, coupled with the fact that the RIM is an averaging
process, can, under certain circumstances, produce distorted or inaccurate cost
figures. Factors that can lead to distortion in the calculation of the inventory
balance include applying the RIM to a group of products that is not fairly
uniform in terms of its cost and selling price relationship and turnover, and
applying RIM to transactions over a period of time that includes different rates
of gross profit, such as those relating to seasonal merchandise. To reduce the
potential of such distortions in the valuation of inventory from occurring, the
Company's RIM utilizes 10 departments in which fairly homogenous classes of
merchandise inventories having similar gross margins are grouped. In addition,
failure to take markdowns currently can result in an overstatement of cost under
the lower of cost or market principle. During fiscal 2000, the Company recorded
markdowns that had not been taken and which served to reduce inventories to
lower of cost or market by approximately $21.5 million.
Management believes that the Company's RIM provides an inventory
valuation which reasonably approximates cost and results in carrying inventory
at the lower of cost or market.
Results of Operations
The following discussion of the Company's financial performance
is based on the Consolidated Financial Statements set forth herein.
Net Sales. Net sales totaled $4.55 billion for 2000, $3.89
billion for 1999 and $3.22 billion for 1998, representing annual increases of
17.0% in 2000, 20.7% in 1999 and 22.6% in 1998. The increases resulted primarily
from 706 net new stores and a same-store sales increase of 0.9% in 2000; 607 net
new stores and a same-store sales increase of 6.4% in 1999; and 518 net new
stores and a same-store sales increase of 8.3% in 1998.
The Company believes that the lower same store sales increase in
2000 was due primarily to the disruptive effect of a comprehensive store reset
program designed to improve the product mix and appearance of its stores, which
affected the vast majority of the store base. This program, which commenced in
May and concluded in August of 2000, involved adding items in faster turning
categories such as food, paper products and health and beauty aids, and reducing
the number of SKUs in the apparel and home products categories. In addition to
these changes in the product mix, the reset involved moving center island
fixtures and relocating within the store much of the existing inventory. The
reset program also included widening store aisles in an effort to make the
shopping experience more convenient for customers. The Company believes this
24
program will ultimately lead to an improvement in sales per square foot. The
implementation of the reset program, however, strained store labor resources and
disrupted operations during the affected period. This disruption resulted in
sporadic out-of-stock conditions, mostly in ancillary items such as mops and
brooms, pet supplies, trash bags and domestics, from May 2000 through December
2000.
Other factors that may have had an impact on the lower same store
sales increase in 2000 include a change in store ordering procedures from a
manual process to a new automated system relying on the scanning of shelf tags,
which may have been an additional cause of the sporadic out-of-stock conditions
experienced by the Company, and a general softening of economic conditions.
The relatively strong same store sales increases in 1999 and 1998
were due primarily to the Company's ongoing shift in emphasis to the consumable
basics segment of its business.
The Company tracks its sales internally by four divisions: highly
consumable, hardware and seasonal, basic clothing and home products. Total
sales in the highly consumable department increased by 26.1%, 46.4% and 23.9%
in 2000, 1999 and 1998, respectively. Total sales in the hardware and seasonal
department increased by 10.2%, 6.0%, and 21.1% in 2000, 1999 and 1998,
respectively. Total sales in the basic clothing department increased by 14.9%,
23.2% and 26.3% in 2000, 1999 and 1998, respectively. Total sales in the home
products department experienced annual changes of 0.5%, (10.7)% and 20.0% in
2000, 1999 and 1998, respectively.
Gross Profit. Gross profit for 2000 was $1.25 billion, or 27.5%
of sales, compared with $1.09 billion, or 28.1% of sales in 1999 and $0.89
billion, or 27.7% of sales, in 1998. The decline in the gross profit rate in
2000 as compared to 1999 was due primarily to the $21.5 million effect of a
markdown recorded in 2000. As described in Note 4 to the Consolidated Financial
Statements (see Item 8), the Company believes that it has certain excess
inventories that will require a markdown to assist with its disposition. The
Company believes that this markdown will be adequate to ensure the sale of the
excess inventory during fiscal years 2001 and 2002. However, there can be no
assurance that the Company will be able to sell all of this inventory by the end
of 2002 without marking down the inventory at issue in amounts exceeding the
markdown recorded to date.
The increase in the gross profit rate in 1999 as compared to 1998
is due primarily to a 62 basis point increase in the initial margin recognized
on inventory purchases resulting, in part, from an increase in 1999 in the
purchase of higher margin private label items and "price" brands, and a
reduction in 1999 in the purchase of lower margin basic clothing items.
25
Inventory shrinkage calculated at the retail value of the
inventory, as a percentage of sales, was 2.80% in 2000, 2.62% in 1999 and 2.59%
in 1998. The Company's goal is to maintain a shrink rate in the range of 1.75%
to 2.00%. In 2001 the Company appointed approximately 25 financial control
specialists to assist its stores with various shrinkage reduction efforts. These
financial control specialists are focusing on activities such as investigating
missing cash deposits and evaluating the processes in stores with consistently
poor shrinkage results.
Distribution and transportation costs increased by 16 basis
points as a percentage of sales in 2000 as compared to 1999, and increased by 5
basis points in 1999 as compared to 1998. The increase in distribution and
transportation costs as a percentage of sales is due in part to the additional
fixed costs associated with the Fulton and Alachua distribution centers, which
were opened in 1999 and 2000, respectively.
Selling, General and Administrative Expense. Total SG&A expense
as a percentage of net sales was 20.5% in 2000, compared with 19.9% in 1999 and
19.9% in 1998. SG&A expense for 2000 was $934.9 million, an increase of 21.0%
compared to 1999. SG&A expense in 1999 was $772.9 million, an increase of 20.9%
over the 1998 total of $639.5 million.
The 66 basis point increase in SG&A expense as a percentage of
net sales experienced in 2000 was due in part to the fact that store labor,
store depreciation and amortization, and store utilities experienced annual
increases of 22.9%, 44.4% and 27.8%, respectively, which were all in excess of
the Company's sales increase of 17.0%. The increase in store labor as a
percentage of sales was due principally to the additional hours required to
complete the store reset program and the general weakness of same store sales.
The increase in store depreciation and amortization expense as a percentage of
sales was a result of the number of new stores subject to capital leases.
Litigation Settlement Expense. The Company recorded $162.0
million in 2000 for the proposed settlement of the restatement-related
litigation. See Note 2 to the Consolidated Financial Statements.
Interest Expense. In 2000, interest expense was $45.4 million
compared with $25.9 million in 1999 and $14.0 million in 1998. The increase in
interest expense in 2000 resulted from the net addition of $213.6 million in
various long-term obligations during 2000.
The average daily total debt outstanding in 2000 was $710.3
million at an average interest rate of 7.2%. The increase in interest expense in
1999 resulted from the addition in 1999 of $293.8 million in various long-term
obligations. The average daily total debt outstanding in 1999 was $454.0 million
at an average interest rate of 6.0%. The average total debt outstanding in 1998
was $253.8 million at an average interest rate of 5.8%.
26
Provision for Taxes on Income. The effective income tax rates for
2000, 1999 and 1998 were 35.0%, 36.7% and 36.9%, respectively. The reduction in
the effective tax rate in 2000 was due to the 38.9% marginal tax rate applied
against the litigation settlement expense. Excluding the tax impact of the
litigation settlement expense, the effective tax rate in 2000 was 37.3%.
Liquidity and Capital Resources
Capital Structure. The Company has accessed capital through
public debt, bank financings, long-term leases and financing obligations. In
2000, the Company financed its short-term working capital needs through
borrowings under the Company's $175 million revolving credit facility and
seasonal bank lines of credit totaling $80 million at February 2, 2001. The
revolving credit facility has two financial covenants, a fixed charge test and a
leverage test. The leverage test was amended in 2000 to provide the Company with
increased operating flexibility. As of December 14, 2001, the revolving credit
facility was priced at LIBOR plus 102.5 basis points. As of February 2, 2001
the Company had no revolving or seasonal loans outstanding and was in compliance
with the financial covenants under the revolving credit facility. As of December
14, 2001, the Company has not renewed its seasonal lines of credit. Until the
restatement-related legal proceedings referred to previously and in Note 9 to
the Consolidated Financial Statements are resolved, the Company may need waivers
in order to draw on the revolving credit facility. The Company's total debt as
of February 2, 2001, was $729.8 million, compared with $516.2 million as of
January 28, 2000, and $222.4 million as of January 29, 1999.
In June 2000, the Company issued $200 million of 8 5/8% notes to
repay outstanding short-term borrowings and for general corporate purposes. The
notes are unsecured and guaranteed by all of the Company's subsidiaries. The
notes have certain restrictive covenants, including limitations on secured
indebtedness and certain sale and leaseback transactions.
As of February 2, 2001, the Company had $383 million outstanding
under two synthetic lease facilities (the "Facilities") maturing in September
2002, one with $212 million in outstanding capital leases and the other with
$171 million in outstanding capital leases. The leases allow for the use and
occupancy of certain real property, including approximately 400 retail stores,
two distribution centers and the Company's headquarters in Goodlettsville,
Tennessee. The Company plans to purchase the properties from the lessor at the
maturity of the Facilities. The Company is currently working on a plan to
refinance the lease obligations. The Facilities have the same two financial
covenants as the revolving credit facility, a fixed charge test and a leverage
test. The facility with $212 million in outstanding capital leases is funded by
a syndicate of financial institutions; borrowings under the facility were priced
at LIBOR plus 102.5 basis points as of December 14, 2001. The pricing spread
over LIBOR fluctuates based on the Company's debt ratings as published by the
27
debt rating agencies. The Company's spread over LIBOR increased to 102.5 basis
points from 15 basis points as part of the October 19, 2001, waiver and
amendment as described below. The facility with $171 million in outstanding
capital leases is funded by commercial paper issued at prevailing market rates
by a commercial paper funding entity and is secured by a letter of credit
facility.
In June 2000, distribution centers in Indianola, Mississippi and
Fulton, Missouri were purchased from the Facilities and sold in sale-leaseback
transactions resulting in twenty-two year, triple net leases with renewal
options for an additional thirty years. These were refinanced to bolster
liquidity and diversify sources of funds.
Throughout 2001, the Company obtained waivers from its lenders
to, among other things, extend the requirement to deliver its audited 2000
financial statements, and unaudited 2001 quarterly financial statements, as a
result of delays related to the restatement described herein. The Company
executed waivers with its lenders under the Facilities and revolving credit
facility on May 10, 2001, June 8, 2001, and July 27, 2001, a waiver and
amendment on October 19, 2001, and waivers on December 28, 2001, and January 10,
2002. The June 8, 2001, waiver prohibited the Company from repurchasing its
shares and limited its capital expenditures to $160 million for the period
commencing on February 2, 2001, and concluding with the delivery of the restated
financial statements. The October 19, 2001, amendment increased the pricing on
the synthetic lease with $212 million in outstanding capital leases and the
revolving credit facility from 15 basis points over LIBOR to 102.5 basis points
over LIBOR, and accelerated the maturity of the second synthetic lease to
September 2002 from June 2004. The Company executed waivers with the lenders
under the Indianola, Mississippi and Fulton, Missouri distribution center leases
on May 7, 2001, May 11, 2001, June 8, 2001, July 30, 2001, October 31, 2001,
December 31, 2001, and January 10, 2002. In addition, the Company executed
waivers with the lenders under the Ardmore and South Boston distribution center
leases on January 10, 2002, and the lender under the Company's airplane lease on
December 21, 2001, and January 7, 2002. The Company paid a total of
approximately $1.6 million in fees for all of the waivers and amendments.
The Company has entered into a settlement agreement with the lead
plaintiffs in the restatement-related class action lawsuits brought against the
Company and its officers and directors. See Item 3 (Restatement-Related
Proceedings), above. Such agreement, which is subject to confirmatory discovery,
court approval and the consent of the Company's insurers, will require a
disbursement by the Company, most likely in the second half of the 2002 fiscal
year, of up to $162 million. The Company expects to fund such amounts out of
operating cash flow, on-hand cash balances and the proceeds of insurance
relating to the settlement of the class action and derivative litigation (see
Note 9 to the Consolidated Financial Statements).
Cash Flow. In 2000, cash provided from operations, long-term
financings and funds available under the Company's credit facilities provided
the resources required to support operations, capital expenditures and working
28
capital requirements. The Company's cash flows enabled it to repay all
short-term borrowings under its credit facility prior to February 2, 2001. As of
December 14, 2001, the Company has not needed to utilize its revolving credit
facility and has not renewed its seasonal lines of credit. Until the
restatement-related legal proceedings referred to previously and in Note 9 to
the Consolidated Financial Statements are resolved, the Company may need a
waiver in order to draw on the revolving credit facility.
Net cash provided by operating activities for fiscal 2000 was
$215.5 million, as compared to $196.7 million for fiscal 1999 and $173.7 million
for fiscal 1998. Cash flow from operations for fiscal 2000 compared to fiscal
1999 increased by $18.8 million, due principally to a reduction in the amount of
cash used to purchase inventory and an increase in accrued expenses and other.
Cash flow from operations increased by $23.0 million in 1999 as compared to
1998, due principally to an increase in net income of $35.7 million in 1999.
Net cash flows used in investing activities was $119.0 million in
2000 versus $139.0 million in 1999 and $143.2 million in 1998. Capital
expenditures for 2000 totaled $216.6 million, compared with $142.1 million for
1999 and $143.4 million for 1998. The Company opened 758 new stores and
relocated or remodeled 237 stores at a cost of $112.7 million in 2000, compared
with opening 646 new stores and relocating or remodeling 409 stores at a cost of
$72.7 million in 1999. The increase in 2000 in store-related capital
expenditures was due principally to the construction of approximately 72
Company-owned stores. Capital expenditures for new, relocated and remodeled
stores totaled $58.0 million during 1998.
Distribution-related capital expenditures totaled $49.3 million
in 2000, resulting primarily from costs associated with the new DCs in Alachua,
Florida, and Zanesville, Ohio. In 1999, distribution-related expenditures
totaled $43.2 million, resulting primarily from costs associated with the
expansion of the Ardmore, Oklahoma DC and the purchase of new delivery trailers.
In 1998, the Company spent $46.3 million, resulting primarily from costs
associated with the expansion of the South Boston, Virginia DC and the purchase
of new delivery trailers.
Capital expenditures during 2001 are projected to be
approximately $135 million. The Company anticipates funding its 2001 capital
requirements with cash flow from operations.
Net cash provided/(used) by financing activities was $11.0
million, $(30.6) million and $(20.8) million in fiscal 2000, 1999 and 1998,
respectively. Cash provided in fiscal 2000 from financing activities reflected
the $200 million of notes issued in June 2000, partially offset by the payment
of $42.2 million of cash dividends, the repurchase of $63.0 million of common
stock, and the repayment of $112.3 million of long-term obligations related
29
primarily to two of the Company's DCs. Cash used in fiscal 1999 by financing
activities reflected the repurchase of $50.8 million of common stock and the
payment of $33.8 million of dividends, offset partially by $38.8 million of cash
proceeds from the exercise of stock options. Cash used in financing activities
in 1998 reflected the repurchase of $73.2 million of common stock, the payment
of $26.7 million of dividends and net repayments of short-term borrowings,
offset partially by $30.7 million of cash proceeds from the exercise of options
and $72.3 million of proceeds from the financing of a distribution center.
As noted above, in September 2002 the Company's synthetic leases,
in the amount of $383 million, will mature and the Company's $175 million
revolving credit facility will expire. The Company expects to refinance the
synthetic lease obligations and to replace the revolving credit facility prior
to such date. The Company may also have to fund during the second half of 2002
the settlement of the class action litigation in an amount of up to $162
million, as further discussed above. The Company believes that its existing cash
balances, cash flow from operations and its ongoing access to the capital
markets will provide sufficient financing to meet these obligations, as well as
the Company's other foreseeable liquidity and capital resource needs. However,
there can be no assurance that the Company will be able to obtain financing in
the amounts that it requires or that the terms of such financing will be as
attractive as the terms on which the Company has obtained financing in the past.
Please refer to "Forward Looking Statements / Risk Factors" for a discussion of
issues that could adversely impact the Company's financial position or its
ability to obtain financing.
Effects of Inflation and Changing Prices
The Company believes that inflation and/or deflation had a
minimal impact on its overall operations during 2000, 1999 and 1998.
Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 effective February
3, 2001. The adoption of SFAS No. 133 did not have a significant impact on the
financial position, results of operations or cash flows of the Company.
In June 2001, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." Under the new rules, goodwill and
30
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
Company will apply the new accounting rules beginning February 2, 2002. The
adoption of SFAS No. 141 and No. 142 will not have a material impact on the
Company's financial position or results of operations.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. SFAS No. 143 applies to legal obligations associated
with the retirement of certain tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. Accordingly, the
Company will adopt this statement on February 1, 2003. The Company believes the
adoption of SFAS 143 will not have a material impact on its Consolidated
Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company will adopt this statement on February 2, 2002. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company believes the adoption of SFAS No. 144 will not have a material
impact on its Consolidated Financial Statements.
Forward Looking Statements / Risk Factors
This discussion and analysis contains historical and
forward-looking information. The forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company believes the assumptions underlying these forward-looking
statements are reasonable; however, any of the assumptions could be inaccurate,
and therefore, actual results may differ materially from those projected in the
forward-looking statements as a result of certain risks and uncertainties. These
risks include, but are not limited to, the following:
The Company's reputation and financial condition could be
affected by the restatement. On April 30, 2001, the Company announced that it
had become aware of certain accounting issues that would cause it to restate its
audited financial statements for fiscal years 1998 and 1999, and to revise the
unaudited financial information for the fiscal year 2000 that had been
previously released by the Company. Following this announcement, more than 20
purported class action lawsuits have been filed against the Company and certain
current and former officers and directors of the Company, asserting claims under
the federal securities laws. These lawsuits have been consolidated into a single
action pending in the United States District Court for the Middle District of
Tennessee. In addition, six purported shareholder derivative lawsuits have been
filed in Tennessee State Court against certain current and
31
former Company directors and officers and Deloitte & Touche LLP, the Company's
former independent accountant, and two purported shareholder derivative lawsuits
have been filed in the United States District Court for the Middle District of
Tennessee against certain current and former Company directors and officers
alleging that they breached their fiduciary duties to the Company. The Company
has also been notified that the SEC is conducting an investigation into the
circumstances that gave rise to the Company's April 30, 2001, announcement.
As discussed above, the Company has entered into settlement
agreements with the purported class action plaintiffs and with the lead counsel
in the lead shareholders derivative action. However, such settlement agreements
are subject to conditions, including the completion of confirmatory due
diligence and court approval. In the event that these settlement agreements do
not become effective, the Company will incur additional significant expenditures
in defending itself and the Company may be exposed to financial losses in excess
of the amounts that the Company has agreed to pay in the settlement agreements.
In addition, the publicity surrounding the litigation and the SEC investigation
could affect the Company's reputation and have an impact on its financial
condition.
The Company's business is modestly seasonal with the highest
sales occurring during the fourth quarter, and adverse events during the fourth
quarter could therefore affect the Company's financial condition. The Company
realizes a large portion of its net sales and net income during the Christmas
selling season. In anticipation of the holidays, the Company purchases
substantial amounts of seasonal inventory and hires many temporary employees. If
for any reason the Company's net sales during the Christmas selling season were
to fall below seasonal norms, a seasonal merchandise inventory imbalance could
result. If such an imbalance were to occur, markdowns might be required to
minimize this imbalance. The Company's profitability and operating results could
be adversely affected by unbudgeted markdowns.
Adverse weather conditions or other disruptions during the peak
Christmas season could also affect the Company's net sales and could make it
more difficult for the Company to obtain sufficient quantities of merchandise
from its suppliers.
Competition in the retail industry could limit the Company's
growth opportunities and reduce its profitability. The Company competes in the
discount retail merchandise business, which is highly competitive. This
competitive environment subjects the Company to the risk of reduced
profitability resulting from reduced margins required to maintain the Company's
competitive position. The Company competes with discount stores and with many
other retailers, including mass merchandise, grocery, drug, convenience, variety
and other specialty stores. Some of the nation's largest retail companies
operate stores in areas where the Company operates. The Company's direct
competitors in the dollar store retail category include Family Dollar, Dollar
Tree, Fred's and various local, independent operators. Competitors from other
32
retail categories include CVS, Rite Aid, Walgreens, Eckerds, Wal-Mart and Kmart.
The discount retail merchandise business is subject to excess capacity and some
of the Company's competitors are much larger and have substantially greater
resources than the Company. The competition for customers has intensified in
recent years as larger competitors, such as Wal-Mart and Kmart, have moved into
the Company's geographic markets. The Company remains vulnerable to the
marketing power and high level of consumer recognition of these major national
discount chains. The Company expects a further increase in competition from
these national discount retailers.
The Company's financial performance is sensitive to changes in
overall economic conditions that may impact consumer spending. The general
slowdown in the United States economy may adversely affect the spending of the
Company's consumers, which would likely result in lower net sales than expected
on a quarterly or annual basis. Future economic conditions affecting disposable
consumer income, such as employment levels, business conditions, fuel and energy
costs, interest rates and tax rates, could also adversely affect the Company's
business by reducing consumer spending or causing consumers to shift their
spending to other products.
The Company's business is dependent on its vendors. The Company
believes that it has generally good relations with its vendors and that it is
generally able to obtain attractive pricing and other terms from vendors. If the
Company fails to maintain good relations with its vendors, it may not be able to
obtain attractive pricing with the consequence that its net sales or profit
margins would be reduced. The Company may also face difficulty in obtaining
needed inventory from its vendors because of interruptions in production or for
other reasons, which would adversely affect the Company's business.
The efficient operation of the Company's business is heavily
dependent on its information systems. As part of its technology update, the
Company installed new flatbed scanners in all its stores and is in the process
of installing new IBM registers and checkouts. The Company depends on a variety
of other information technology systems for the efficient functioning of its
business. The Company relies on certain software vendors to maintain and
periodically upgrade many of these systems so that they can continue to support
the Company's business. The software programs supporting many of the Company's
systems were licensed to the Company by independent software developers. The
inability of these developers to continue to maintain and upgrade these
information systems and software programs would disrupt or reduce the efficiency
of the Company's operations if it were unable to convert to alternate systems in
an efficient and timely manner.
The Company is subject to interest rate risk. The Company is
subject to market risk from exposure to changes in interest rates based on its
financing, investing and cash management activities. The Company utilizes a
33
credit facility to fund working capital requirements, which is comprised of
variable rate debt. See "Item 7A - Quantitative and Qualitative Disclosures
About Market Risk."
The Company is dependent upon the smooth functioning of its
distribution network. The Company relies upon the ability to replenish depleted
inventory through deliveries to its distribution centers from vendors, and from
the distribution centers to its stores by various means of transportation,
including shipments by air, sea and truck on the roads and highways of the
United States. Long-term disruptions to the national and international
transportation infrastructure that lead to delays or interruptions of service
will adversely affect the Company's business.
The Company is dependent on the continued availability of capital
to support its business. As discussed above, in September 2002 the Company's
synthetic leases, in the amount of $383 million, will mature and the Company's
$175 million revolving credit facility will expire. The Company may also have to
fund during the second half of 2002 the settlement of the class action
litigation discussed above in an amount of up to $162 million. In addition, the
Company will continue to need capital to support its plans for future growth. A
decline in the Company's generation of cash flow or the inability of the Company
to obtain financing from third parties would have a material adverse effect on
the Company.
On October 2, 2001, Standard & Poor's lowered the Company's
corporate credit, senior unsecured debt and senior unsecured bank loan ratings
from BBB+ to BBB-; as the date hereof, these ratings remain on CreditWatch with
negative implications. On October 2, 2001, Moody's Investors Service, Inc. also
lowered the Company's senior unsecured credit rating, from Baa2 to Ba1, which
rating is on review for further possible downgrades. Credit ratings are
generally used by investors to assess the ability of a company to meet its
obligations. The downgrade in the Company's credit ratings may affect the
Company's ability to obtain financing in the future, and will also affect the
terms of any such financing.
Moreover, in order to issue debt securities to the public, the
Company will have to comply with the registration requirements of the Securities
and Exchange Commission, including among other things the requirement that the
Company disclose "Selected Financial Information" for a period of five fiscal
years. This may require the Company to restate its financial statements for
periods prior to the 1998 fiscal year. Unless and until it is able to do so, the
Company will not be able to access the public capital markets and as a result
will be limited to non-public sources of financing, which may result in
increased costs, less favorable terms, and/or lesser availability than might be
obtainable in the public capital markets.
34
Caution should be taken not to place undue reliance on
forward-looking statements made herein, since the statements speak only as of
the date they are made. The Company undertakes no obligation to publicly release
any revisions to any forward-looking statements contained herein to reflect
events or circumstances occurring after the date of this report or to reflect
the occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Risk Management
The Company is exposed to market risk primarily from adverse
changes in interest rates. To minimize such risk, the Company may periodically
use financial instruments, including derivatives. As a matter of policy, the
Company does not buy or sell financial instruments for speculative or trading
purposes and all financial instrument transactions must be authorized and
executed pursuant to Board of Directors approval. All financial instrument
positions taken by the Company are used to reduce risk by hedging an underlying
economic exposure. Because of high correlation between the financial instrument
and the underlying exposure being hedged, fluctuations in the value of the
financial instruments are generally offset by reciprocal changes in the value of
the underlying economic exposure. The financial instruments used by the Company
are straightforward instruments with liquid markets.
The Company has cash flow exposure relating to variable interest
rates, primarily associated with revolving and seasonal lines of credit and
certain lease obligations, and seeks to manage this risk through the use of
interest rate swaps. The primary interest rate exposure on variable rate
obligations is based on the London Interbank Offered Rate ("LIBOR").
At February 2, 2001, and January 28, 2000, the fair value of the
Company's debt, excluding capital lease obligations, was estimated at
approximately $295.9 million and $87.7 million, respectively, based on the
estimated market value of the debt at those dates. Such fair value is less than
the carrying value of the debt at February 2, 2001, and January 28, 2000, by
approximately $0.7 million and $10.4 million, respectively.
At February 2, 2001, the Company was party to an interest rate
swap agreement with a notional amount of $100 million. The Company designated
this agreement as a hedge of floating rate commitments relating to its synthetic
lease agreements. Under the terms of the agreement, the Company will pay a fixed
rate of 5.60% on the $100 million notional amount through September 1, 2002. The
fair value of the interest rate swap agreement was $(0.4) million at February 2,
2001. The counterparty to the Company's interest rate swap agreement was a major
financial institution. The Company is exposed to credit risk in the event of
non-performance by such counterparty, the amount of which exposure is limited to
35
the unpaid portion of amounts due to the Company pursuant to the interest rate
swap agreement, if any. Although there are no collateral requirements if a
downgrade in the credit rating of the counterparty occurs, the Company believes
that its exposure is mitigated by provisions in the interest rate swap agreement
that allow the Company to offset any amounts payable by the Company to the
counterparty with any amounts due to the Company from the counterparty.
At January 28, 2000, the Company was party to two interest rate
swap agreements with notional amounts totaling $200 million. These agreements
fixed the Company's floating rate commitments relating to a portion of its
synthetic lease agreements. Under the terms of these agreements, the Company
paid a weighted average fixed rate of 5.14% on the $200 million notional amount
during fiscal years 1999 and 2000. The fair value of these agreements at January
28, 2000, was $3.1 million. As of that date the maturity date for both
agreements was expected to occur in September 2002. In January 2001, the Company
paid $0.2 million to terminate one of those interest rate swap agreements.
In both 1999 and 2000, the Company recognized any differences
paid or received on interest rate swap agreements as adjustments to interest
expense.
Based upon the Company's variable rate borrowing levels, a 1%
change in interest rates would have resulted in a pre-tax fluctuation of
approximately $1.6 million and $2.6 million, including the effects of interest
rate swaps, in 1999 and 2000, respectively. In 2001, the Company does not
anticipate this expense fluctuation to vary materially from the estimated impact
in 2000.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
January 28, 2000
February 2, 2001 (Restated)
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 162,310 $ 54,742
Merchandise inventories 896,235 952,432
Deferred income taxes 21,514 20,486
Other current assets 44,868 46,455
--------------------------------------------------------------------------------------------------------------------
Total current assets 1,124,927 1,074,115
--------------------------------------------------------------------------------------------------------------------
Property and equipment, at cost:
Land 119,410 91,491
Buildings 286,476 250,919
Furniture, fixtures and equipment 823,234 651,656
Construction in progress 110,434 115,310
--------------------------------------------------------------------------------------------------------------------
1,339,554 1,109,376
Less accumulated depreciation and amortization 366,460 271,987
--------------------------------------------------------------------------------------------------------------------
Net property and equipment 973,094 837,389
--------------------------------------------------------------------------------------------------------------------
Merchandise inventories 116,000 --
--------------------------------------------------------------------------------------------------------------------
Deferred income taxes 52,708 --
--------------------------------------------------------------------------------------------------------------------
Other assets, net 15,733 12,124
--------------------------------------------------------------------------------------------------------------------
Total assets $2,282,462 $1,923,628
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 9,035 $ 1,828
Accounts payable 297,262 344,598
Accrued expenses and other 214,192 166,290
Income taxes 17,446 26,991
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 537,935 539,707
--------------------------------------------------------------------------------------------------------------------
Long-term obligations 720,764 514,362
--------------------------------------------------------------------------------------------------------------------
Deferred income taxes -- 24,206
--------------------------------------------------------------------------------------------------------------------
Litigation settlement payable 162,000 --
--------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Series B junior participating preferred stock, stated value $0.50 per share;
Shares authorized: 10,000,000; Issued: None -- --
Common stock, par value $.50 per share;
Shares authorized: 500,000,000; Issued: 2000-331,292,000;
1999-330,822,000 165,646 165,411
Additional paid-in capital 283,925 229,906
Retained earnings 414,318 450,036
--------------------------------------------------------------------------------------------------------------------
863,889 845,353
Less common stock purchased by employee deferred compensation trust:
2000-94,000; 1999-None 2,126 --
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 861,763 845,353
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,282,462 $1,923,628
====================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
37
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
For the years ended
-----------------------------------------------------------------------------
January 28, 2000 January 29, 1999
February 2, 2001 (Restated) (Restated)
---------------------- ----------------------- --------------------------
% of % of % of
Net Net Net
Amount Sales Amount Sales Amount Sales
----------------------------------------------------------------------------------------------------------------------
Net sales $4,550,571 100.00% $3,887,964 100.00% $3,220,989 100.00%
Cost of goods sold 3,299,668 72.51 2,794,466 71.87 2,328,470 72.29
----------------------------------------------------------------------------------------------------------------------
Gross profit 1,250,903 27.49 1,093,498 28.13 892,519 27.71
Selling, general and
administrative 934,899 20.54 772,928 19.88 639,534 19.86
Litigation settlement expense 162,000 3.56 -- --
----------------------------------------------------------------------------------------------------------------------
Operating profit 154,004 3.39 320,570 8.25 252,985 7.85
Interest expense 45,357 1.00 25,873 0.67 13,976 0.43
----------------------------------------------------------------------------------------------------------------------
Income before taxes on income 108,647 2.39 294,697 7.58 239,009 7.42
Provisions for taxes on income 38,005 .84 108,024 2.78 88,075 2.73
----------------------------------------------------------------------------------------------------------------------
Net income $ 70,642 1.55% $ 186,673 4.80% $ 150,934 4.69%
======================================================================================================================
Diluted earnings per share $ 0.21 $ 0.55 $ 0.45
Weighted average diluted shares (000) 333,858 337,904 335,763
Basic earnings per share $ 0.21 $ 0.61 $ 0.53
======================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended February 2, 2001, January 28, 2000, and January 29, 1999
(Dollars in thousands except per share amounts)
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
---------------------------------------------------------------------------------------------------------------------------
Balances, January 30, 1998
(as previously reported) $ 858 $ 163,149 $ 301,558 $ 318,858 $(200,527) $ 583,896
Restatement adjustments -- -- 761 (23,791) -- (23,030)
---------------------------------------------------------------------------------------------------------------------------
Balances, January 30, 1998
(restated) $ 858 $ 163,149 $ 302,319 $ 295,067 $(200,527) $ 560,866
Net income -- -- -- 150,934 -- 150,934
Cash dividends, $0.08 per
common share -- -- -- (24,428) -- (24,428)
Cash dividends, $2.04 per
preferred share -- -- -- (3,497) -- (3,497)
Issuance of common stock
under stock incentive
plans (5,717,000 shares) -- 2,858 27,902 -- -- 30,760
Tax benefit from exercise
of options -- -- 32,252 -- -- 32,252
Repurchase of common
stock (3,901,000 shares) -- (1,950) -- (71,286) -- (73,236)
Transfer to 401(k) plan
(51,000 shares) -- 16 739 -- -- 755
---------------------------------------------------------------------------------------------------------------------------
39
Additional
Preferred Common Paid-in Retained Treasury
Stock Stock Capital Earnings Stock Total
---------------------------------------------------------------------------------------------------------------------------
Balances, January 29, 1999
(restated) $ 858 $ 164,073 $ 363,212 $ 346,790 $ (200,527) $ 674,406
Net income -- -- -- 186,673 -- 186,673
Cash dividends,
$0.10 per common share -- -- -- (32,879) -- (32,879)
Cash dividends,
$0.69 per preferred share -- -- -- (1,178) -- (1,178)
Issuance of common stock
under stock incentive
plans (5,442,000 shares) -- 2,721 36,076 -- -- 38,797
Tax benefit from exercise
of options -- -- 30,287 -- -- 30,287
Repurchase of common
stock (2,766,000 shares) -- (1,383) -- (49,370) -- (50,753)
Conversion of preferred to
common
(51,133,000 shares) (858) -- (199,669) -- 200,527 --
---------------------------------------------------------------------------------------------------------------------------
Balances, January 28, 2000
(restated) $ -- $ 165,411 $ 229,906 $ 450,036 $ -- $ 845,353
Net income -- -- -- 70,642 -- 70,642
Cash dividends,
$0.12 per common share -- -- -- (42,266) -- (42,266)
Issuance of common stock
under stock incentive
plans (4,103,000 shares) -- 2,052 32,078 -- -- 34,130
Tax benefit from exercise
of options -- -- 19,018 -- -- 19,018
Repurchase of common
stock, net
(3,634,000 shares) -- (1,817) 2,923 (64,094) -- (62,988)
Purchase of common stock
by employee deferred
compensation trust
(94,000 shares) -- -- -- -- (2,126) (2,126)
---------------------------------------------------------------------------------------------------------------------------
Balances, February 2, 2001 $ -- $ 165,646 $ 283,925 $ 414,318 $ (2,126) $ 861,763
===========================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended
------------------------------------------------------
February 2, January 28, 2000 January 29, 1999
2001 (Restated) (Restated)
--------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 70,642 $ 186,673 $ 150,934
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 111,399 79,707 57,414
Deferred income taxes (77,942) (2,261) (3,889)
Tax benefit from stock option exercises 19,018 30,287 32,252
Litigation settlement 162,000 -- --
Change in operating assets and liabilities:
Merchandise inventories (59,803) (158,836) (171,239)
Other current assets 4,650 (15,351) (11,230)
Accounts payable (47,336) 78,002 86,623
Accrued expenses and other 39,391 (2,144) 14,931
Income taxes (9,545) 4,125 20,640
Other 3,031 (3,480) (2,745)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 215,505 196,722 173,691
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (216,584) (142,070) (143,382)
Proceeds from sale of property and equipment 97,612 3,051 222
--------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (118,972) (139,019) (143,160)
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term borrowings 220,000 295,324 165,000
Repayments of short-term borrowings (220,000) (295,324) (186,933)
Issuance of long-term obligations 199,595 22,848 72,257
Repayments of long-term obligations (112,276) (7,705) (2,667)
Payment of cash dividends (42,237) (33,791) (26,661)
Proceeds from exercise of stock options 34,130 38,797 30,727
Repurchase of common stock, net (62,988) (50,753) (73,236)
Purchase of common stock by employee deferred
compensation trust (2,126) -- --
Settlement of derivative financial instruments (3,063) -- --
Transfer to ESOP -- -- 755
--------------------------------------------------------------------------------------------------------------------
Net cash provided by / (used in) financing activities 11,035 (30,604) (20,758)
--------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 107,568 27,099 9,773
Cash and cash equivalents, beginning of year 54,742 27,643 17,870
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 162,310 $ 54,742 $ 27,643
--------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Cash paid during year for:
Interest $ 50,027 $ 28,026 $ 16,166
Income taxes $ 104,311 $ 77,038 $ 43,512
--------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and
financing activities:
Purchase of property and equipment under capital
lease obligations $ 126,290 $ 272,233 $ 120,863
Conversion of preferred stock to common stock -- $ 200,527 --
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation and accounting policies
Basis of presentation
These notes contain references to the years 2000, 1999 and 1998,
which represent fiscal years ended February 2, 2001, January 28, 2000, and
January 29, 1999, respectively. The Company's fiscal year ends on the Friday
closest to January 31. There were 53 weeks in the fiscal year ended February 2,
2001. There were 52 weeks in the fiscal years ended January 28, 2000, and
January 29, 1999. The consolidated financial statements include all
subsidiaries. Intercompany transactions have been eliminated.
The Company sells general merchandise on a retail basis through
5,000 stores (as of February 2, 2001) located predominantly in small towns in
the Southeastern and Midwestern United States. The Company has distribution
centers ("DCs") in Scottsville, Kentucky; Ardmore, Oklahoma; South Boston,
Virginia; Indianola, Mississippi; Fulton, Missouri; Alachua, Florida and
Zanesville, Ohio.
All share and per share data reflect the effect of common stock
splits.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less when purchased.
Inventories
Inventories are stated at the lower of cost or market with cost
determined using the retail last-in, first-out ("LIFO") method. The excess of
current cost over LIFO cost was approximately $18.3 million at February 2, 2001,
$18.7 million at January 28, 2000, and $18.5 million at January 29, 1999.
Current cost is determined using the retail first-in first-out method. LIFO
reserves decreased $0.4 million in 2000, increased $0.2 million in 1999 and
decreased $1.4 million in 1998. Costs directly associated with warehousing and
distribution are capitalized into inventory.
Pre-opening costs
Pre-opening costs for new stores are expensed as incurred.
Property and equipment
Property and equipment are recorded at cost. The Company provides
for depreciation on a straight-line basis over the following estimated useful
lives: 40 years for buildings and 3 to 10 years for furniture, fixtures and
42
equipment. Amortization of capital lease assets is included in depreciation
expense. Depreciation expense related to property and equipment was
approximately $110.9 million in 2000, $79.4 million in 1999 and $56.4 million in
1998.
Software costs
Costs associated with the application development stage of
significant new computer software applications for internal use are deferred and
amortized over periods ranging from three to five years. Costs associated with
the preliminary and post-implementation stages of these projects are expensed as
incurred.
Impairment
When indicators of impairment are present, the Company evaluates
the carrying value of property and equipment and intangibles in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. The Company adjusts the net book value of the underlying assets if the
sum of expected future cash flows is less than the book value. Assets to be
disposed of are adjusted to the fair value less the cost to sell if less than
the book value. In 2000, the Company recorded an approximate $3.6 million
impairment charge to reduce the carrying value of the closed Homerville, Georgia
DC that is included in SG&A expense.
Other assets
Other assets consist primarily of debt issuance costs and
deferred finance charges which are amortized over the life of the related
obligation.
Insurance claims provisions
The Greater Cumberland Insurance Company, a Vermont-based,
wholly-owned captive insurance subsidiary, charges Dollar General's subsidiary
companies competitive premium rates to insure workers' compensation and
non-property general liability claims risk. The insurance company currently
insures no unrelated third-party risk.
The Company retains a significant portion of the risk for its
workers' compensation, employee health insurance, general liability, property
and automobile coverage. Accordingly, provisions are made for the Company's
actuarially determined estimates of undiscounted future claim costs for such
risks. To the extent that subsequent claim costs vary from those estimates,
future earnings will be affected.
43
Fair value of financial instruments
The carrying amounts reflected in the consolidated balance sheets
for cash, cash equivalents, receivables and payables approximate their
respective fair values. At February 2, 2001, and January 28, 2000, the fair
value of the Company's debt, excluding capital lease obligations, was
approximately $295.9 million and $87.7 million, respectively, based upon the
estimated market value of the debt at those dates. Such fair value is less than
the carrying value of the debt at February 2, 2001, and January 28, 2000, by
approximately $0.7 million and $10.4 million, respectively. Fair values are
based primarily on quoted prices for those or similar instruments. A comparison
of the carrying value and fair value of the Company's derivative financial
instruments is included in the section entitled "Derivative financial
instruments" in Note 1.
Derivative financial instruments
At February 2, 2001, the Company was party to an interest rate
swap agreement with a notional amount of $100 million. The Company designated
this agreement as a hedge of the floating rate commitments relating to its
synthetic lease agreements. Under the terms of the agreement, the Company will
pay a fixed rate of 5.60% on the $100 million notional amount through September
1, 2002. The fair value of the interest rate swap agreement was ($0.4) million
at February 2, 2001.
At January 28, 2000, the Company was party to two interest rate
swap agreements with notional amounts totaling $200 million. These agreements
fixed the Company's floating rate commitments relating to a portion of its
synthetic lease agreements. Under the terms of these agreements, the Company
paid a weighted average fixed rate of 5.14% on the $200 million notional amount
during fiscal years 1999 and 2000. The fair value of these agreements at January
28, 2000, was $3.1 million. As of that date, the maturity date of both
agreements was expected to occur in September 2002. In January 2001, the Company
paid $0.2 million to terminate one of these interest rate swap agreements.
The Company does not hold or issue derivative financial instruments for
speculative or trading purposes. The Company recognizes floating rate interest
differentials as adjustments to expense in the period they occur. Gains and
losses on terminations of interest rate swap agreements are deferred and
amortized to expense over the shorter of the original term of the agreements or
the remaining life of the associated outstanding commitment. Approximately $2.9
million of realized losses relating to the early termination of interest rate
derivatives were deferred at February 2, 2001. The fair values of the Company's
interest rate swap agreements at February 2, 2001, and January 28, 2000, were
based on dealer quotes. These values represent the amount the Company would
receive or pay to terminate the agreements taking into consideration current
interest rates. At February 2, 2001, the counterparty to the Company's interest
rate swap agreement was a major financial institution. This counterparty exposes
44
the Company to credit risk in the event of non-performance. The amount of such
exposure is limited to the unpaid portion of amounts due to the Company pursuant
to the interest rate swap agreement, if any. Although there are no collateral
requirements if a downgrade in the credit rating of the counterparty occurs,
management believes that this exposure is mitigated by provisions in the
interest rate swap agreement which allow for the legal right of offset of any
amounts due to the Company from the counterparty with any amounts payable to the
counterparty by the Company. As a result, management considers the risk of
counterparty default to be minimal.
Stock-based compensation
The Company grants stock options having a fixed number of shares
and an exercise price equal to the fair value of the stock on the date of grant
to certain executive officers, directors and key employees. The Company accounts
for stock option grants in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations because the Company believes the alternative fair value
accounting provided for under Statement of Financial Accounting Standards
("SFAS") Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB No. 25, compensation expense is
generally not recognized for plans in which the exercise price of the stock
options equals the market price of the underlying stock on the date of grant and
the number of shares subject to exercise is fixed.
The Company has historically permitted employees to use shares
acquired through the exercise of stock options to satisfy tax-withholding
requirements in excess of minimum employer statutory withholding rates. The
Company recognizes compensation expense for such stock option exercises and
grants in accordance with the provisions of EITF 87-6, "Adjustments Relating to
Stock Compensation Plans," and FIN No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB 25," as applicable. On
December 17, 2001, the Company modified its personnel policies to eliminate the
employee excess tax-withholding option.
The Company recognized compensation expense relating to its stock
option plans of approximately $1.9 million, $3.0 million and $1.8 million in
2000, 1999 and 1998, respectively.
Revenue recognition
The Company recognizes sales at the time the sale is made to the
customer.
45
Advertising costs
Advertising costs are expensed as incurred and were $7.0 million,
$6.8 million and $5.7 million in 2000, 1999 and 1998, respectively.
Interest during construction
To assure that interest costs properly reflect only that portion
relating to current operations, interest on borrowed funds during the
construction of property and equipment is capitalized. Interest costs
capitalized were approximately $6.7 million, $3.1 million and $3.0 million in
2000, 1999 and 1998, respectively.
Income taxes
The Company reports income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the asset and liability
method is used for computing future income tax consequences of events, which
have been recognized in the Company's consolidated financial statements or
income tax returns. Deferred income tax expense or benefit is the net change
during the year in the Company's deferred income tax assets and liabilities.
Management estimates
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
At February 2, 2001, a portion of the Company's merchandise
inventory is in excess of the amounts that management believes will be sold in
the next fiscal year. Management has developed a program to sell this inventory.
See Note 4, Inventory Markdown. However, there can be no assurance that the
Company will be able to sell all of this inventory by the end of 2002 without a
further markdown.
The Company is exposed to losses as a result of various lawsuits
(see Note 9 Commitments and Contingencies) related to the restatement. The
Company has entered into settlement agreements with the lead plaintiffs of most
of these lawsuits, as a result of which the Company has recognized an expense of
$162.0 million in the fourth quarter of 2000 for the estimated costs of
resolving these actions. The Company intends to assert defenses against these
suits in the event that the settlement agreements that have been reached to date
do not successfully resolve these matters. As these cases are at an early stage,
46
the amount of potential loss, if any, should the settlement agreements not
become effective cannot be reasonably estimated.
The Company records gain contingencies when realized.
Accounting pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 effective February
3, 2001. The adoption of SFAS No. 133 did not have a significant impact on the
financial position, results of operations or cash flows of the Company.
The Company adopted the Securities and Exchange Commission's
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," in the fourth quarter of 2000. The adoption of SAB No. 101 did not
have a material effect on the consolidated financial statements.
In June 2001, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives. The
Company will apply the new accounting rules beginning February 2, 2002. The
adoption of SFAS No. 141 and No. 142 will not have a material impact on the
Company's financial position or results of operations.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" in June 2001. SFAS No. 143 applies to legal obligations associated
with the retirement of certain tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. Accordingly, the
Company will adopt this statement on February 1, 2003. The Company believes the
adoption of SFAS No. 143 will not have a material impact on its Consolidated
Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Company will adopt this statement on February 2, 2002. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
47
The Company believes the adoption of SFAS No. 144 will not have a material
impact on its Consolidated Financial Statements.
2. Restatement of Financial Statements
Overview
On April 30, 2001, the Company announced that it had become aware
of certain accounting issues that would cause it to restate its audited
financial statements for fiscal years 1999 and 1998, and to revise the unaudited
financial information for the fiscal year 2000 that had been previously released
by the Company. The Audit Committee of the Board of Directors promptly assumed
oversight of the Company's response to the accounting issues and commenced an
independent review of these accounting issues to prepare the Committee for its
role in reviewing the restated financial statements, assisted by the law firm of
Dechert, Price and Rhoads and the independent accounting firm Arthur Andersen,
LLP. The Company further announced on June 7, 2001, that its Chairman and Chief
Executive Officer had directed the Company's financial staff and its outside
professional consultants to review the Company's reporting, record keeping,
accounting and internal control policies and practices, and that until such
review had been concluded the Company would not be in a position to update its
prior financial guidance. The Company's financial staff conducted its review of
these issues with the assistance of the Company's outside counsel, Debevoise &
Plimpton, and accounting consultants from KPMG LLP.
Consistent with the activities of the Audit Committee and the
Company's review of its financial statements for the 1998, 1999 and 2000 fiscal
years, the Company has restated its audited financial statements for fiscal
years 1999 and 1998, and has set forth in these Consolidated Financial
Statements the Company's audited financial results for fiscal year 2000, which
restate the unaudited financial information for the fiscal year 2000 that had
been previously released by the Company. Previously released financial data for
such periods should not be relied upon. For restated unaudited quarterly
financial data for 2000 and 1999, see Note 14.
Restated net income and diluted earnings per share for 2000 are
$70.6 million and $0.21, respectively, as compared to the $206.0 million and
$0.62 previously reported. The restated results for 2000 include a pre-tax
expense of $162.0 million to settle the Company's restatement-related litigation
described below. Restated net income totaled $186.7 million in fiscal 1999 and
$150.9 million in fiscal 1998, equaling diluted earnings per share of $0.55, and
$0.45. The Company originally reported, prior to the restatement, net income of
$219.4 million in fiscal 1999 and $182.0 million in fiscal 1998, equaling
diluted earnings per share for those periods of $0.65 and $0.54, respectively.
48
The issues for restatement, excluding the litigation settlement
expense, can be broken down into four general categories: (i) items impacting
the cost of goods sold that were recorded incorrectly and/or that reflect more
accurate estimates, (ii) selling, general and administrative ("SG&A") expenses
that were either incurred but not accrued, or recorded incorrectly, (iii)
additional interest expense required as a result of restating certain operating
leases as capital leases and financing obligations, and the addition of capital
lease and financing obligation liabilities to the Company's balance sheets, and
(iv) changes to the Company's income tax provision to correct errors.
The effects of these issues on diluted earnings per share over
the three-year period is summarized in the following table:
Year Ended
----------------------------------------------------------
Adjustments to diluted 3 Year February 2, January 28, January 29,
earnings per share*: Cumulative 2001 2000 1999
---------- ------------ ----------- -----------
Cost of goods sold $ (0.05) $ (0.01) $ (0.01) $ (0.03)
Selling, general & (0.11) (0.02) (0.05) (0.04)
administrative expenses
Interest expense (0.11) (0.06) (0.04) (0.01)
Tax provision (0.02) (0.01) (0.00) (0.01)
---------- ------------ ----------- -----------
$ (0.30) $ (0.11) $ (0.10) $ (0.09)
========== ============ =========== ===========
* Totals may not foot due to rounding; excludes litigation
settlement expense.
Although the issues for restatement in total had a negative
aggregate impact on diluted earnings per share over the three year-period, some
of the issues resulted in the recording of additional income, while others
affected multiple years but had no impact on earnings over the combined
three-year period.
Effects of restatement
In addition to the restatement of diluted earnings per share, the
correction of many of the issues identified by the Company also required an
adjustment to previously reported balance sheets. The following statements of
income and balance sheets reconcile previously reported and restated financial
information. Dollar amounts are in thousands except for per share amounts. Some
of the amounts in the following tables may not foot due to rounding.
49
CONSOLIDATED STATEMENT OF INCOME
Year ended February 2, 2001
-----------------------------------------------------
As Previously
Released Restatement Related
(unaudited) Adjustments As Restated
------------- ------------------- -----------
Amount Amount Amount
---------------------------------------------------------------------------------------------------
Net sales $ 4,551,511 $ (940) $ 4,550,571
Cost of goods sold 3,293,126 6,542 3,299,668
---------------------------------------------------------------------------------------------------
Gross profit 1,258,385 (7,482) 1,250,903
Selling, general and administrative 923,760 11,139 934,899
Litigation settlement expense -- 162,000 162,000
---------------------------------------------------------------------------------------------------
Operating profit 334,625 (180,621) 154,004
Interest expense 11,508 33,849 45,357
---------------------------------------------------------------------------------------------------
Income before taxes on income 323,117 (214,470) 108,647
Provisions for taxes on income 117,098 (79,093) 38,005
---------------------------------------------------------------------------------------------------
Net income $ 206,019 $ (135,377) $ 70,642
===================================================================================================
Diluted earnings per share $ 0.62 $ (0.41) $ 0.21
Weighted average diluted shares (000) 333,858 -- 333,858
Basic earnings per share $ 0.62 $ (0.41) $ 0.21
===================================================================================================
50
CONSOLIDATED BALANCE SHEET
As of February 2, 2001
---------------------------------------------------------
As Previously
Released Restatement Related
(unaudited) Adjustments As Restated
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 141,453 $ 20,857 $ 162,310
Merchandise inventories 1,050,693 (154,458) 896,235
Deferred income taxes 8,074 13,440 21,514
Other current assets 69,108 (24,240) 44,868
-----------------------------------------------------------------------------------------------------------------------------------
Total current assets 1,269,328 (144,401) 1,124,927
-----------------------------------------------------------------------------------------------------------------------------------
Property and equipment, at cost:
Land 5,948 113,462 119,410
Buildings 34,665 251,811 286,476
Furniture, fixtures and equipment 687,201 136,033 823,234
Construction in progress 68,705 41,729 110,434
-----------------------------------------------------------------------------------------------------------------------------------
796,519 543,035 1,339,554
Less accumulated depreciation
and amortization 305,756 60,704 366,460
-----------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 490,763 482,331 973,094
-----------------------------------------------------------------------------------------------------------------------------------
Merchandise inventories -- 116,000 116,000
-----------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes -- 52,708 52,708
-----------------------------------------------------------------------------------------------------------------------------------
Other assets, net 16,045 (312) 15,733
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,776,136 $ 506,326 $ 2,282,462
===================================================================================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 4,560 $ 4,475 $ 9,035
Accounts payable 284,768 12,494 297,262
Accrued expenses and other 137,350 76,842 214,192
Income taxes 8,648 8,798 17,446
-----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 435,326 102,609 537,935
-----------------------------------------------------------------------------------------------------------------------------------
Long-term obligations 214,236 506,528 720,764
-----------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 51,290 (51,290) --
-----------------------------------------------------------------------------------------------------------------------------------
Litigation settlement payable -- 162,000 162,000
-----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Series B junior participating
preferred stock -- -- --
Common stock 165,646 -- 165,646
Additional paid-in capital 274,112 9,813 283,925
Retained earnings 637,652 (223,334) 414,318
Less common stock purchased by
employee deferred compensation
trust 2,126 -- 2,126
-----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,075,284 (213,521) 861,763
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,776,136 $ 506,326 $ 2,282,462
===================================================================================================================================
51
CONSOLIDATED STATEMENT OF INCOME
For the year ended January 28, 2000
---------------------------------------------------------
As Previously Restatement Related
Reported Adjustments As Restated
----------- ----------- -----------
Amount Amount Amount
----------------------------------------------------------------------------------------
Net sales $3,887,964 $ 0 $3,887,964
Cost of goods sold 2,790,173 4,293 2,794,466
---------------------------------------------------------------------------------------
Gross profit 1,097,791 (4,293) 1,093,498
Selling, general and
administrative 748,489 24,439 772,928
---------------------------------------------------------------------------------------
Operating profit 349,302 (28,732) 320,570
Interest expense 5,157 20,716 25,873
---------------------------------------------------------------------------------------
Income before taxes on 344,145 (49,448) 294,697
income
Provisions for taxes
on income 124,718 (16,694) 108,024
---------------------------------------------------------------------------------------
Net income $ 219,427 $ (32,754) $ 186,673
=======================================================================================
Diluted earnings per share $ 0.65 $ (0.10) $ 0.55
Weighted average diluted
shares (000) 336,963 941 337,904
Basic earnings per share $ 0.72 $ (0.11) $ 0.61
=======================================================================================
CONSOLIDATED BALANCE SHEET
As of January 28, 2000
---------------------------------------------------------
As Previously Restatement Related
Reported Adjustments As Restated
-------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 58,789 $ (4,047) $ 54,742
Merchandise inventories 985,715 (33,283) 952,432
Deferred income taxes 5,995 14,491 20,486
Other current assets 45,036 1,419 46,455
--------------------------------------------------------------------------------------------------------
Total current assets 1,095,535 (21,420) 1,074,115
--------------------------------------------------------------------------------------------------------
Property and equipment, at cost:
Land 5,907 85,584 91,491
Buildings 32,807 218,112 250,919
Furniture, fixtures and equipment 554,598 97,058 651,656
Construction in progress 4,225 111,085 115,310
--------------------------------------------------------------------------------------------------------
597,537 511,839 1,109,376
Less accumulated depreciation and
amortization 251,064 20,923 271,987
--------------------------------------------------------------------------------------------------------
Net property and equipment 346,473 490,916 837,389
--------------------------------------------------------------------------------------------------------
Other assets, net 8,933 3,191 12,124
--------------------------------------------------------------------------------------------------------
Total assets $ 1,450,941 $ 472,687 $ 1,923,628
========================================================================================================
52
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations $ 1,233 $ 595 $ 1,828
Accounts payable 334,554 10,044 344,598
Accrued expenses and other 121,375 44,915 166,290
Income taxes 15,135 11,856 26,991
--------------------------------------------------------------------------------------------------------
Total current liabilities 472,297 67,410 539,707
--------------------------------------------------------------------------------------------------------
Long-term obligations 1,200 513,162 514,362
--------------------------------------------------------------------------------------------------------
Deferred income taxes 51,523 (27,317) 24,206
--------------------------------------------------------------------------------------------------------
Shareholders' equity:
Series B junior participating
preferred stock -- -- --
Common stock 132,346 33,065 165,411
Additional paid-in capital 255,581 (25,675) 229,906
Retained earnings 537,994 (87,958) 450,036
--------------------------------------------------------------------------------------------------------
Total shareholders' equity 925,921 (80,568) 845,353
--------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,450,941 $ 472,687 $ 1,923,628
========================================================================================================
CONSOLIDATED STATEMENT OF INCOME
For the year ended January 29, 1999
------------------------------------------------------
As Previously Restatement Related
Reported Adjustments As Restated
----------- ----------- -----------
Amount Amount Amount
-------------------------------------------------------------------------------------------------------
Net sales $3,220,989 $ -- $3,220,989
Cost of goods sold 2,315,112 13,358 2,328,470
-------------------------------------------------------------------------------------------------------
Gross profit 905,877 (13,358) 892,519
Selling, general and administrative 616,613 22,921 639,534
-------------------------------------------------------------------------------------------------------
Operating profit 289,264 (36,279) 252,985
Interest expense 8,349 5,627 13,976
-------------------------------------------------------------------------------------------------------
Income before taxes on income 280,915 (41,906) 239,009
Provisions for taxes on income 98,882 (10,807) 88,075
-------------------------------------------------------------------------------------------------------
Net income $ 182,033 $ (31,099) $ 150,934
=======================================================================================================
Diluted earnings per share $ 0.54 $ (0.09) $ 0.45
Weighted average diluted shares (000) 335,498 265 335,763
Basic earnings per share $ 0.65 $ (0.11) $ 0.53
=======================================================================================================
3. Cash and short-term borrowings
The Company's cash management system provides for daily
investment of available balances and the funding of outstanding checks when
presented for payment. Outstanding but unpresented checks totaling approximately
$84.3 million and $127.5 million at February 2, 2001, and January 28, 2000,
53
respectively, have been included in accounts payable. Upon presentation for
payment, they will be funded through available cash balances or the Company's
revolver.
The Company had seasonal lines of credit with banks totaling
$80.0 million at February 2, 2001, and $105.0 million at January 28, 2000. The
lines of credit are subject to periodic review by the lending institutions,
which may increase or decrease the amounts available. There were no borrowings
outstanding under these lines of credit at February 2, 2001, and January 28,
2000. The Company also has a $175.0 million revolver that expires in September
2002. There were no borrowings outstanding under the revolver at February 2,
2001, or January 28, 2000. Until the restatement-related legal proceedings
referred to below in Note 9 are resolved, the Company may need waivers in order
to draw on the revolver. The seasonal lines of credit have expired.
The weighted average interest rates for all short-term borrowings
were 6.6% and 5.4% for 2000 and 1999, respectively. The revolver contains
certain restrictive covenants. At December 31, 2001, the Company was in
compliance with all such covenants (see Note 7).
At February 2, 2001, and January 28, 2000, the Company had
outstanding commercial letters of credit totaling $60.8 million and $53.6
million, respectively. Total amounts available for the issuance of commercial
letters of credit were $210.0 million at February 2, 2001, and $285.0 million at
January 28, 2000.
4. Inventory markdown
In the fourth quarter of 2000, the Company determined that it had
certain excess inventory that would require a markdown to assist with its
disposition. Accordingly, the Company recorded a markdown which had the impact
of reducing inventory at cost at February 2, 2001, and increasing cost of goods
sold in the fourth quarter of 2000 by approximately $21.5 million. The Company
believes that this markdown will be adequate to ensure the sale of the excess
inventory during fiscal years 2001 and 2002. However, there can be no assurance
that the Company will be able to sell all of this inventory by the end of 2002
without a further markdown. The Company moved $116.0 million of inventory out of
current assets at February 2, 2001, that it does not expect to sell during 2001.
54
5. Accrued expenses and other
Accrued expenses and other consist of the following:
(In thousands) 2000 1999
------------------------------------------------------------------------------
Compensation and benefits $ 54,559 $ 58,707
Insurance 46,238 35,710
Taxes (other than taxes on income) 27,507 20,864
Dividends 10,598 8,467
Freight 14,367 10,827
Other 60,923 31,715
------------------------------------------------------------------------------
$214,192 $166,290
==============================================================================
6. Income taxes
The provision for taxes on income consists of the following:
(In thousands) 2000 1999 1998
------------------------------------------------------------------------------
Current:
Federal $ 103,158 $ 100,367 $ 83,969
State 12,789 9,918 7,995
------------------------------------------------------------------------------
115,947 110,285 91,964
------------------------------------------------------------------------------
Deferred:
Federal (66,781) (965) (3,328)
State (11,161) (1,296) (561)
------------------------------------------------------------------------------
(77,942) (2,261) (3,889)
------------------------------------------------------------------------------
$ 38,005 $ 108,024 $ 88,075
==============================================================================
A reconciliation between actual income taxes and amounts computed
by applying the federal statutory rate to income before income taxes is
summarized as follows (in thousands):
2000 1999 1998
------------------- ------------------- -------------------
U.S. Federal statutory rate on earnings
before income taxes $ 38,026 35.0% $ 103,144 35.0% $ 83,653 35.0%
State income taxes, net of federal income
tax benefit 402 0.4% 4,759 1.6% 4,781 2.0%
Jobs credits, net of federal income tax
benefit (1,123) (0.9)% (755) (0.2)% (642) (0.2)%
Increase in valuation allowance 657 0.5% 844 0.3% 51 0.0%
Other 43 0.0% 32 0.0% 232 0.1%
------------------------------------------------------------------------------------------------------------------------
Actual income taxes $ 38,005 35.0% $ 108,024 36.7% $ 88,075 36.9%
========================================================================================================================
55
Sources of deferred tax assets and deferred tax liabilities are
as follows (in thousands):
2000 1999
-------- --------
Deferred tax assets:
Inventories $ 1,897 $ 4,287
Deferred compensation expense 3,437 2,978
Accrued expenses and other 8,451 8,489
Workers compensation-related insurance reserves 4,003 2,991
Deferred gain on sale/leasebacks 3,702 479
Litigation settlement 63,000 --
Other 2,839 2,054
State tax net operating loss carryforwards 2,506 2,350
State tax credit carryforwards 813 898
---------------------------------------------------------------------------------------
90,648 24,526
Less valuation allowance (2,117) (1,460)
---------------------------------------------------------------------------------------
Total deferred tax assets 88,531 23,066
---------------------------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment (9,968) (24,561)
Compensation-related liabilities (1,976) (1,711)
Other (2,365) (514)
---------------------------------------------------------------------------------------
Total deferred tax liabilities (14,309) (26,786)
---------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 74,222 $ (3,720)
=======================================================================================
State net operating loss carryforwards as of February 2, 2001,
totaled approximately $76.3 million that will expire between 2005 and 2020. The
valuation allowance has been provided for certain state loss carryforwards and
state tax credits. The change in the valuation allowance was $657,000, $844,000
and $51,000 as of 2000, 1999 and 1998, respectively. Based upon expected future
income, management believes that it is more likely than not that the results of
operations will generate sufficient taxable income to realize the deferred tax
assets after giving consideration to the valuation allowance.
7. Long-term obligations
Long-term obligations consist of the following (in thousands):
February 2, 2001 January 28, 2000
-------------------------------------------------------------------------------------------------------
8 5/8% Notes due June 15, 2010, net of discount of $405 $ 199,595 $ --
Capital lease obligations 433,099 418,001
Financing obligations (see Note 9) 97,002 98,039
Other notes payable, weighted average fixed interest rate of
10.5% at February 2, 2001, payable in monthly installments
to January 2003 103 150
-------------------------------------------------------------------------------------------------------
729,799 516,190
Less: current portion (9,035) (1,828)
-------------------------------------------------------------------------------------------------------
Long-term portion $ 720,764 $ 514,362
=======================================================================================================
56
On June 21, 2000, the Company sold $200 million principal amount
of 8 5/8% Notes due June 2010 (the "Old Notes") in a private offering under Rule
144A of the Securities Act of 1933. Subsequent to the offering, the Company and
its guarantor subsidiaries filed a registration statement on Form S-4 enabling
the Company to exchange its 8 5/8% Exchange Notes due June 2010 (the "New Notes"
and, together with the Old Notes, the "Notes") for all outstanding Old Notes.
The Notes require semi-annual interest payments in June and
December of each year through June 15, 2010, at which time the entire balance
becomes due and payable. In addition, the Notes may be redeemed by the holders
thereof at 100% of the principal amount, plus accrued and unpaid interest, on
June 15, 2005. The Notes contain certain restrictive covenants. At February 2,
2001, the Company was in compliance with all such covenants.
As of February 2, 2001, the Company had $383 million outstanding
under two synthetic lease facilities (the "Facilities") maturing in September
2002, one with $212 million in outstanding capital leases and the other with
$171 million in outstanding capital leases. The leases allow for the use and
occupancy of certain real property, including approximately 400 retail stores,
two distribution centers and the Company's headquarters in Goodlettsville,
Tennessee. The Company plans to purchase the properties from the lessor at the
maturity of the Facilities. The Company is currently working on a plan to
refinance the lease obligations. The Facilities have the same two financial
covenants as the revolving credit facility, a fixed charge test and a leverage
test. The facility with $212 million in outstanding capital leases is funded by
a syndicate of financial institutions; borrowings under the facility were priced
at LIBOR plus 102.5 basis points as of December 14, 2001. The pricing spread
over LIBOR fluctuates based on the Company's debt ratings as published by the
debt rating agencies. The Company's spread over LIBOR increased to 102.5 basis
points from 15 basis points as part of the October 19, 2001 waiver and amendment
as described below. The facility with $171 million in outstanding capital leases
is funded by commercial paper issued at prevailing market rates by a commercial
paper funding entity and is secured by a letter of credit facility.
In June 2000, distribution centers in Indianola, Mississippi and
Fulton, Missouri were purchased from the Facilities and sold in sale-leaseback
transactions resulting in twenty-two year, triple net leases with renewal
options for an additional thirty years. These were refinanced to bolster
liquidity and diversify sources of funds.
Throughout 2001, the Company obtained waivers from its lenders to
extend the requirement to deliver its audited 2000 financial statements, and
unaudited 2001 quarterly financial statements, as a result of delays related to
the restatement described herein. The Company executed waivers with its lenders
under the Facilities and revolving credit facility on May 10, 2001, June 8,
2001, and July 27, 2001, a waiver and amendment on October 19, 2001, and waivers
on
57
December 28, 2001, and January 10, 2002. The June 8, 2001 waiver
prohibited the Company from repurchasing its shares and limited its capital
expenditures to $160 million for the period commencing on February 2, 2001, and
concluding with the delivery of the restated financial statements. The October
19, 2001, amendment increased the pricing on the synthetic lease with $212
million in outstanding capital leases and the revolving credit facility from 15
basis points over LIBOR to 102.5 basis points over LIBOR, and accelerated the
maturity of the second synthetic lease to September 2002 from June 2004. The
Company executed waivers with the lenders under the Indianola, Mississippi and
Fulton, Missouri distribution center leases on May 7, 2001, May 11, 2001, June
8, 2001, July 30, 2001, October 31, 2001, December 31, 2001, and January 10,
2002. In addition, the Company executed waivers with the lenders under the
Ardmore and South Boston distribution center leases on January 10, 2002, and the
lender under the Company's airplane lease on December 21, 2001, and January 7,
2002. The Company paid a total of approximately $1.6 million in fees for all of
the waivers and amendments.
8. Earnings per share
Amounts are in thousands except per share data, and shares have
been adjusted to give retroactive effect to all common stock splits.
2000
---------------------------------------------------
Income Shares Per Share
Amount
---------------------------------------------------
Net income $70,642
----------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders 70,642 329,741 $ 0.21
========
Stock options 4,117
----------------------------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders plus
assumed conversions $70,642 333,858 $ 0.21
================================================================================== ========
1999
---------------------------------------------------
Income Shares Per Share
Amount
---------------------------------------------------
Net income $186,673
Less: preferred stock dividends 1,178
----------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders 185,495 302,251 $ 0.61
========
Stock options 6,716
Convertible preferred stock 1,178 28,937
----------------------------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders plus
assumed conversions $186,673 337,904 $ 0.55
=================================================================================== ========
58
1998
---------------------------------------------------
Income Shares Per Share
Amount
---------------------------------------------------
Net income $150,934
Less: preferred stock dividends 3,497
----------------------------------------------------------------------------------
Basic earnings per share
Income available to common shareholders 147,437 276,321 $ 0.53
========
Stock options 8,309
Convertible preferred stock 3,497 51,133
----------------------------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders plus
assumed conversions $150,934 335,763 $ 0.45
================================================================================== ========
Basic earnings per share was computed by dividing income
available to common shareholders by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share was
determined based on the assumption that the convertible preferred stock was
converted upon issuance on August 22, 1994, and for the dilutive effect of stock
options using the treasury stock method.
Options to purchase shares of common stock that were outstanding
at the end of the respective fiscal year (but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares) were 10.2
million, 4.8 million and 1.1 million in 2000, 1999 and 1998, respectively.
9. Commitments and contingencies
Leases
As of February 2, 2001, the Company and certain subsidiaries were
committed under capital and operating lease agreements and financing obligations
for retail stores, DCs and administrative office space as well as for certain
furniture, fixtures and equipment. Most of the stores are operated under
operating leases that include renewal options for periods ranging from two to
five years and provisions for contingent rentals based upon a percentage of
defined sales volume. Certain leases contain restrictive covenants. As of
February 2, 2001, the Company was in compliance with such covenants.
In January 1999 and April 1997, the Company sold its DCs located
in Ardmore, Oklahoma and South Boston, Virginia, respectively, for 100% cash
consideration. Concurrent with the sale transactions, the Company leased the
properties back for periods of 25 and 23 years, respectively. The transactions
have been recorded as financing obligations rather than sales as a result of,
among other things, the lessor's ability to put the properties back to the
Company under certain circumstances. The property and equipment, along with the
59
related lease obligations, associated with these transactions will continue to
be recorded in the accompanying financial statements.
Future minimum payments as of February 2, 2001, for capital
leases, operating leases and financing obligations, are as follows:
(in thousands) Capital leases Financing obligations Operating leases
---------------------------------------------------------------------------------------------------------------
2001 $ 37,938 $ 9,018 $ 138,236
2002 409,952 9,283 115,641
2003 11,340 9,283 86,124
2004 11,234 9,283 53,608
2005 7,469 9,283 30,951
Thereafter 12,060 173,778 151,752
--------- --------- ---------
Total minimum payments 489,993 219,928 $ 576,312
=========
Less: Imputed interest (56,894) (122,926)
--------- ---------
Present value of net minimum lease
payments 433,099 97,002
Less: current portion (7,917) (1,118)
--------- ---------
Long-term portion $ 425,182 $ 95,884
========= =========
Capitalized leases were discounted at an effective interest rate
of approximately 6.8% at February 2, 2001. The gross amount of property and
equipment recorded under capital leases or financing obligations at February 2,
2001, and January 28, 2000, were $506.9 million and $410.0 million,
respectively.
Rent expense under all operating leases was as follows:
(In thousands) 2000 1999 1998
------------------------------------------------------------------------
Minimum rentals $141,627 $117,378 $ 96,520
Contingent rentals 12,584 13,817 13,458
------------------------------------------------------------------------
$154,211 $131,195 $109,978
========================================================================
Legal proceedings
Restatement-Related Proceedings. Following the April 30, 2001,
announcement discussed above, more than 20 purported class action lawsuits
were filed against the Company and certain current and former officers and
directors of the Company, asserting claims under the federal securities laws.
These lawsuits have been consolidated into a single action pending in the United
States District Court for the Middle District of Tennessee. On July 17, 2001,
the court entered an order appointing the Florida State Board of Administration
and the Teachers' Retirement System of Louisiana as lead plaintiffs and the law
firms of Entwistle & Cappucci LLP, Milberg Weiss Bershad Hynes & Lerach LLP and
Grant & Eisenhofer, P.A. as co-lead counsel. On January 3, 2002, the lead
plaintiffs filed an amended consolidated class action complaint purporting to
name as plaintiffs a class of persons who held or purchased the Company's
60
securities and related derivative securities between May 12, 1998, and September
21, 2001. Among other things, plaintiffs have alleged that the Company and
certain of its current and former officers and directors made misrepresentations
concerning the Company's financial results in the Company's filings with the
Securities and Exchange Commission and in various press releases and other
public statements. The plaintiffs seek damages with interest, costs and such
other relief as the court deems proper.
The Company has reached a settlement agreement with the purported
class action plaintiffs, pursuant to which the Company has agreed to pay $140
million to such plaintiffs in settlement for their claims, and to implement
certain enhancements to its corporate governance and internal control
procedures. Such agreement is subject to confirmatory discovery, to the final
approval of the Company's Board of Directors, and to court approval. Following
the completion of confirmatory discovery, plaintiffs have the right under the
settlement agreement to amend their complaint further to increase the size of
the class, and to negotiate with the Company for additional damages, the
aggregate amount of all damages to be paid in settlement of plaintiffs' claims
not to exceed $162 million. The Company expects that following the completion of
such confirmatory discovery, the plaintiffs will amend their complaint and seek
aggregate damages of $162 million. The Company has accordingly recognized an
expense of $162 million in the fourth quarter of 2000. The Company expects to
receive from its insurers approximately $4.5 million in respect of the class
action settlement, which amount has not been accrued in the Company's financial
statements.
In addition, six purported shareholder derivative lawsuits have
been filed in Tennessee State Court against certain current and former Company
directors and officers and Deloitte & Touche LLP, the Company's former
independent accountant. The Company is named as a nominal defendant in the
actions, which seek restitution and/or compensatory and punitive damages with
interest, equitable and/or injunctive relief, costs and such further relief as
the court deems proper. By order entered October 31, 2001, the court appointed
Michael Dixon, Jr., Carolinas Electrical Workers Retirement Fund and Thomas
Dewey, plaintiffs in one of the six filed cases, as lead plaintiffs and the law
firms of Branstetter, Kilgore Stranch & Jennings and Stanley, Mandel & Iola as
lead counsel. In the same order, the court stayed the remaining cases pending
completion of the lead case. Among other things, the plaintiffs allege that
certain current and former Company directors and officers breached their
fiduciary duties to the Company and that Deloitte & Touche aided and abetted
those breaches and was negligent in its service as the Company's independent
accountant. During August and September 2001, the Company moved to dismiss all
six cases for failure to make a pre-suit demand on the Board of Directors and,
in the alternative, requested that the court stay the actions pending the
completion of an investigation into the allegations in the complaints by the
Shareholder Derivative Claim Review Committee of the Company's Board of
Directors. The lead plaintiffs filed an opposition to this motion on October 2,
2001. A hearing on the motion has not yet been scheduled.
61
Two purported shareholder derivative lawsuits also have been
filed in the United States District Court for the Middle District of Tennessee
against certain current and former Company directors and officers alleging that
they breached their fiduciary duties to the Company. The Company is named as a
nominal defendant in these actions, which seek declaratory relief, compensatory
and punitive damages, costs and such further relief as the court deems proper.
By motion filed on September 28, 2001, the Company requested that the federal
court abstain from exercising jurisdiction over the purported shareholder
derivative actions in deference to the pending state court actions. By agreement
of the parties and court order dated December 3, 2001, the case has been stayed
until June 3, 2002.
The Company and the individual defendants have reached a
settlement agreement with lead counsel to the plaintiffs in the lead Tennessee
state shareholder derivative action. The agreement includes a payment to the
Company from a portion of the proceeds of the Company's director and officer
liability insurance policies as well as certain corporate governance and
internal control enhancements. Pursuant to the terms of such agreement, the
Company anticipates that all of the stayed cases, including the federal
derivative cases described above, will be dismissed with prejudice by the courts
in which they are pending. Such agreement is subject to confirmatory discovery,
to the final approval of the Company's Board of Directors, and to court
approval. If the settlement agreement is approved, the Company expects that it
will result in a net payment to the Company, after attorneys' fees payable to
the plaintiffs' counsel, of approximately $24.8 million, which has not been
accrued in the Company's financial statements.
The Company believes that it has substantial defenses to the
purported class action and the derivative lawsuits and intends to assert these
defenses in the courts in which the actions are pending in the event the
settlement agreements referred to above do not successfully resolve these
matters. These cases are at an early stage and the amount of potential loss, if
any, should the settlement agreements not become effective cannot be reasonably
estimated. An unfavorable outcome for the Company in these actions could have a
material adverse impact on the Company's financial position and results of
operations.
The Company has been notified that the SEC is conducting an
investigation into the circumstances that gave rise to the Company's April 30,
2001, announcement. The Company is cooperating with this investigation by
providing documents and other information to the SEC.
Other Litigation. The Company was involved in other litigation,
investigations of a routine nature and various legal matters during 2000, which
were, and are being, defended and otherwise handled in the ordinary course of
business. While the ultimate results of these matters cannot be determined or
predicted, management believes that they have not had and will not have a
62
material adverse effect on the Company's results of operations or financial
position.
10. Employee benefits
Effective January 1, 1998, the Company established a 401(k)
savings and retirement plan. All employees who complete 12 months of service,
work 1,000 hours, and are at least 21 years of age are eligible to participate
in the plan. Employee contributions, up to 6% of annual compensation, are
matched by the Company at the rate of $0.50 on the dollar. The Company also
contributes a discretionary amount annually to the plan equal to 2% of each
employee's annual compensation. Expense for this plan was approximately $7.9
million in 2000, $7.0 million in 1999 and $5.5 million in 1998.
Effective January 1, 1998, the Company also established a
supplemental retirement plan and a compensation deferral plan for a select group
of management and highly compensated employees. The supplemental retirement plan
is a noncontributory defined contribution plan with annual Company contributions
ranging from 2% to 12% of base pay plus bonus depending upon age plus years of
service and salary level. Under the compensation deferral plan, participants may
defer up to 100% of base pay and 100% of bonus pay. Effective January 1, 2000,
both the supplemental retirement plan and compensation deferral plan were
amended and restated so that such plans were combined into one master plan
document. An employee may be designated for participation in one or both of the
plans, according to the eligibility requirements of the plans. Expense for these
plans was approximately $0.1 million in 2000, $1.1 million in 1999 and $0.1
million in 1998.
In September 2000, the supplemental retirement plan and
compensation deferral plan assets were invested in Company stock and mutual
funds as designated by the plan participants and placed in a rabbi trust. The
mutual funds are stated at fair market value, which is based on quoted market
prices, and are included in other current assets. In accordance with EITF No.
97-14 "Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested," the Company's stock held in the trust
is recorded at historical cost and classified as treasury stock. Pursuant to the
terms of the plan, a participant's account balance will be paid in cash by (a)
lump sum, (b) monthly installments over a 5, 10 or 15 year period or (c) a
combination of lump sum and installments. The deferred compensation liability is
recorded at the fair value of the investments held in the trust and is included
in accrued expenses.
11. Capital stock
In 1994, the Company exchanged 1.7 million shares of Series A
Convertible Junior Preferred Stock for the 8.6 million shares of Dollar General
common stock owned by C.T.S., Inc., a personal holding company controlled by
members of the Turner family, the founders of Dollar General. The Series A
63
Convertible Junior Preferred Stock was authorized by the Board of Directors out
of the authorized but unissued preferred stock approved by the Company's
shareholders in 1992. On August 23, 1999, the holders of all of the Company's
1.7 million shares of Series A Convertible Junior Preferred Stock converted
their shares to 51.1 million split-adjusted shares of Dollar General Common
Stock in accordance with the relevant provisions of the Company's charter.
Consequently, preferred stock and treasury stock balances were reduced to zero
and Series A Convertible Junior Preferred Stock is no longer outstanding or
authorized for issuance.
The Company has a Shareholder Rights Plan (the "Plan") under
which Series B Junior Participating Preferred Stock Purchase Rights (the
"Rights") were issued for each outstanding share of common stock. The Rights
were attached to all common stock outstanding as of March 10, 2000, and will be
attached to all additional shares of common stock issued prior to the Plan's
expiration on February 28, 2010, or such earlier termination, if applicable. The
Rights entitle the holders to purchase from the Company one one-hundredth of a
share (a "Unit") of Series B Junior Participating Preferred Stock (the
"Preferred Stock"), no par value, at a purchase price of $100 per Unit, subject
to adjustment. Initially, the Rights will attach to all certificates
representing shares of outstanding Common Stock, and no separate Rights
Certificates will be distributed. The Rights will become exercisable upon the
occurrence of a triggering event as defined in the Plan.
The Company has 5 million shares of common stock available for
repurchase through August 2002 under its authorized repurchase program.
12. Stock incentive plans
The Company has established stock incentive plans under which
options to purchase common stock may be granted to executive officers, directors
and key employees.
All options granted in 2000, 1999 and 1998 under the 1998 Stock
Incentive Plan, the 1995 Employee Stock Incentive Plan, the 1993 Employee Stock
Incentive Plan and the 1995 Outside Directors Stock Option Plan, were
non-qualified stock options issued at a price equal to the fair market value of
the Company's common stock on the date of grant. Non-qualified options granted
under these plans have expiration dates no later than 10 years following the
date of grant.
Under the plans, grants are made to key management employees
ranging from executive officers to store managers and assistant store managers,
as well as other employees as prescribed by the Company's Corporate Governance
and Compensation Committee of the Board of Directors. The number of options
granted and the vesting schedules of those options are directly linked to the
employee's performance, Company performance and employee tenure depending on the
employee's position within the Company.
64
The plans also provide for annual grants to non-employee
directors according to a non-discretionary formula. The number of shares granted
is dependent upon current director compensation levels and the fair market value
of the stock on the grant date.
The Company applies APB 25, and related interpretations in
accounting for its plans. Under this intrinsic-value based method of accounting,
compensation expense is generally not recognized for plans in which the exercise
price of the stock options equals the market price of the underlying stock on
the date of grant and the number of shares subject to exercise is fixed. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, net income and
earnings per share would have been reduced to the pro forma amounts indicated in
the following table.
(Amounts in thousands except per share data) 2000 1999 1998
------------------------------------------------------------------------------------------------------
Net income - as reported $ 70,642 $ 186,673 $ 150,934
Net income - pro forma $ 50,805 $ 164,260 $ 135,848
------------------------------------------------------- ---------- ----------- -----------
Earnings per share - as reported
Basic $ 0.21 $ 0.61 $ 0.53
Diluted $ 0.21 $ 0.55 $ 0.45
Earnings per share - pro forma
Basic $ 0.15 $ 0.54 $ 0.48
Diluted $ 0.15 $ 0.49 $ 0.40
------------------------------------------------------- ---------- ----------- -----------
Earnings per share have been adjusted to give retroactive effect
to all common stock splits.
The pro forma effects on net income for 2000, 1999 and 1998 are
not representative of the pro forma effect on net income in future years because
they do not take into consideration pro forma compensation expense related to
grants made prior to 1995. The fair value of options granted during 2000, 1999
and 1998 is $10.76, $9.26 and $8.04, respectively.
The fair value of each option grant is estimated on the date of
grant using the Black Scholes option pricing model with the following
assumptions:
65
2000 1999 1998
-----------------------------------------------------------------------------
Expected dividend yield 0.7% 0.7% 0.7%
Expected stock price volatility 49.0% 48.0% 48.0%
Weighted average risk-free interest rate 6.2% 5.3% 5.5%
Expected life of options (years) 6.8 4.5 3.0
-----------------------------------------------------------------------------
The Black-Scholes option model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
A summary of the balances and activity for all of the Company's
stock incentive plans for the last three fiscal years is presented below:
Shares Weighted Average
Under Plans Exercise Price
-------------------------------------------------------------------------
Balance, January 30, 1998 25,276,005 $ 6.65
Granted 6,145,195 15.76
Exercised (5,717,075) 5.29
Canceled (2,132,001) 9.85
-------------------------------------------------------------------------
Balance, January 29, 1999 23,572,124 9.06
Granted 5,968,592 21.24
Exercised (5,442,217) 6.46
Canceled (1,432,590) 13.35
-------------------------------------------------------------------------
Balance, January 28, 2000 22,665,909 12.62
Granted 5,795,360 19.75
Exercised (4,102,739) 7.17
Canceled (2,267,402) 17.30
-------------------------------------------------------------------------
Balance, February 2, 2001 22,091,128 $ 15.02
=========================================================================
The following table summarizes information about stock options
outstanding at February 2, 2001:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Exercise
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
-----------------------------------------------------------------------------------------------------------
$ 0.73 - $10.00 5,036,162 4.2 $ 5.21 3,783,564 $ 5.69
$ 10.01 - $20.00 9,639,233 7.5 15.06 5,200,905 13.81
$ 20.01 - $23.90 7,415,733 8.7 21.64 1,123,851 22.30
-----------------------------------------------------------------------------------------------------------
$ 0.73 - $23.90 22,091,128 7.2 $ 15.02 10,108,320 $ 11.72
===========================================================================================================
66
At February 2, 2001, there were approximately 24.7 million shares
available for granting of stock options under the Company's stock option plans.
13. Segment reporting
The Company manages its business on the basis of one reportable
segment. See Note 1 for a brief description of the Company's business. As of
February 2, 2001, all of the Company's operations were located within the United
States. The following data is presented in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
(In thousands) 2000 1999 1998
------------------------------------------------------------------------------------------
Classes of similar products:
Net sales:
Highly consumable $2,518,052 $1,996,454 $1,364,032
Hardware and seasonal 706,140 640,791 604,485
Basic clothing 554,117 482,390 391,609
Home products 772,262 768,329 860,863
------------------------------------------------------------------------------------------
$4,550,571 $3,887,964 $3,220,989
==========================================================================================
14. Quarterly financial data (unaudited)
The following is selected unaudited quarterly financial data, as
previously reported and as restated, for the fiscal years ended February 2,
2001, and January 28, 2000. Amounts are in thousands except per share data. Per
share data has been adjusted for all common stock splits. Some of the amounts in
the following tables may not foot due to rounding.
First Quarter of the year ended February 2, 2001
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
2000:
Net sales $ 997,079 $ -- $ 997,079
Gross profit 272,709 (3,302) 269,407
Net income 44,340 (15,005) 29,335
Diluted earnings per share $ 0.13 $ (0.04) $ 0.09
Basic earnings per share $ 0.13 $ (0.05) $ 0.09
67
Second Quarter of the year ended February 2, 2001
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
2000:
Net sales $1,017,418 $ -- $ 1,017,418
Gross profit 281,973 2,077 284,050
Net income 39,310 (11,524) 27,786
Diluted earnings per share $ 0.12 $ (0.03) $ 0.08
Basic earnings per share $ 0.12 $ (0.04) $ 0.08
Third Quarter of the year ended February 2, 2001
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
2000:
Net sales $1,094,360 $ -- $ 1,094,360
Gross profit 321,364 (3,020) 318,344
Net income 50,990 (5,314) 45,676
Diluted earnings per share $ 0.15 $ (0.02) $ 0.14
Basic earnings per share $ 0.15 $ (0.02) $ 0.14
Fourth Quarter of the year ended February 2, 2001 (A)
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
2000:
Net sales $1,442,654 $ (940) $ 1,441,714
Gross profit 382,339 (3,237) 379,102
Net income 71,379 (103,534) (32,155)
Diluted earnings per share $ 0.21 $ (0.31) $ (0.10)
Basic earnings per share $ 0.22 $ (0.31) $ (0.10)
(A) The fourth quarter of the year ended February 2, 2001 contains
the markdown described in Note 4, which increased cost of goods sold
by $21.5 million and the litigation settlement expense of $162.0
million described in Note 9.
68
First Quarter of the year ended January 28, 2000
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
1999:
Net sales $ 844,593 $ -- $ 844,593
Gross profit 225,947 3,249 229,196
Net income 36,348 (4,272) 32,076
Diluted earnings per share $ 0.11 $ (0.01) $ 0.10
Basic earnings per share $ 0.13 $ (0.01) $ 0.11
Second Quarter of the year ended January 28, 2000
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
1999:
Net sales $ 915,210 $ -- $ 915,210
Gross profit 249,582 336 249,918
Net income 41,615 (6,596) 35,019
Diluted earnings per share $ 0.12 $ (0.02) $ 0.10
Basic earnings per share $ 0.15 $ (0.02) $ 0.12
Third Quarter of the year ended January 28, 2000
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
1999:
Net sales $ 950,419 $ 0 $ 950,419
Gross profit 277,857 (2,887) 274,970
Net income 50,859 (7,683) 43,176
Diluted earnings per share $ 0.15 $ (0.02) $ 0.13
Basic earnings per share $ 0.15 $ (0.02) $ 0.14
69
Fourth Quarter of the year ended January 28, 2000
Restatement
As Previously Related
Reported Adjustments As Restated
------------- ------------ ------------
1999:
Net sales $1,177,742 $ 0 $1,177,742
Gross profit 344,405 (4,991) 339,414
Net income 90,605 (14,202) 76,403
Diluted earnings per share $ 0.27 $ (0.04) $ 0.23
Basic earnings per share $ 0.27 $ (0.04) $ 0.23
15. Guarantor subsidiaries
All of the Company's subsidiaries (the "Guarantors") have fully
and unconditionally guaranteed on a joint and several basis the Company's
obligations under the Notes described in Note 7. Each of the Guarantors is a
wholly owned subsidiary of the Company. The Guarantors comprise all of the
direct and indirect subsidiaries of the Company. The following consolidating
schedules present condensed financial information on a combined basis. Dollar
amounts are in thousands.
70
February 2, 2001
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------------------------------
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents $ 120,643 $ 41,667 $ -- $ 162,310
Merchandise inventories -- 896,235 -- 896,235
Deferred income taxes 6,380 15,134 -- 21,514
Other current assets 15,372 606,000 (576,504) 44,868
---------------------------------------------------------------------------
Total current assets 142,395 1,559,036 (576,504) 1,124,927
---------------------------------------------------------------------------
Property and equipment, at cost 145,294 1,194,260 -- 1,339,554
Less accumulated
depreciation and amortization 37,876 328,584 -- 366,460
---------------------------------------------------------------------------
Net property and equipment 107,418 865,676 -- 973,094
---------------------------------------------------------------------------
Merchandise inventories -- 116,000 -- 116,000
Deferred income taxes 57,946 -- (5,238) 52,708
Other assets, net 1,707,740 578 (1,692,585) 15,733
---------------------------------------------------------------------------
Total assets $ 2,015,499 $ 2,541,290 $(2,274,327) $ 2,282,462
===========================================================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations $ 856 $ 8,179 $ -- $ 9,035
Accounts payable 663,373 210,393 (576,504) 297,262
Accrued expenses and other 54,289 159,903 -- 214,192
Income taxes 6,875 10,571 -- 17,446
---------------------------------------------------------------------------
Total current liabilities 725,393 389,046 (576,504) 537,935
---------------------------------------------------------------------------
Long-term obligations 266,343 972,401 (517,980) 720,764
---------------------------------------------------------------------------
Litigation settlement payable 162,000 -- -- 162,000
---------------------------------------------------------------------------
Deferred income taxes -- 5,238 (5,238) --
---------------------------------------------------------------------------
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 165,646 23,853 (23,853) 165,646
Additional paid-in capital 283,925 929,677 (929,677) 283,925
Retained earnings 414,318 221,075 (221,075) 414,318
---------------------------------------------------------------------------
863,889 1,174,605 (1,174,605) 863,889
Less common stock
purchased by employee
deferred compensation trust 2,126 -- -- 2,126
---------------------------------------------------------------------------
Total shareholders' equity 861,763 1,174,605 (1,174,605) 861,763
---------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,015,499 $ 2,541,290 $(2,274,327) $ 2,282,462
===========================================================================
71
January 28, 2000
---------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
---------------------------------------------------------------------------
BALANCE SHEET DATA:
ASSETS
Current assets:
Cash and cash equivalents $ 42,688 $ 12,054 $ -- $ 54,742
Merchandise inventories -- 952,432 -- 952,432
Deferred income taxes 4,652 15,834 -- 20,486
Other current assets 24,515 842,946 (821,006) 46,455
---------------------------------------------------------------------------
Total current assets 71,855 1,823,266 (821,006) 1,074,115
---------------------------------------------------------------------------
Property and equipment, at cost 121,799 987,577 -- 1,109,376
Less accumulated depreciation and
amortization 26,420 245,567 -- 271,987
---------------------------------------------------------------------------
Net property and equipment 95,379 742,010 -- 837,389
---------------------------------------------------------------------------
Other assets, net 1,744,731 1,262 (1,733,869) 12,124
---------------------------------------------------------------------------
Total assets $ 1,911,965 $ 2,566,538 $(2,554,875) $ 1,923,628
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations $ 1,250 $ 578 $ -- $ 1,828
Accounts payable 949,914 215,690 (821,006) 344,598
Accrued expenses and other 49,698 116,592 -- 166,290
Income taxes 4,390 22,601 -- 26,991
---------------------------------------------------------------------------
Total current liabilities 1,005,252 355,461 (821,006) 539,707
---------------------------------------------------------------------------
Long-term obligations 57,123 824,287 (367,048) 514,362
---------------------------------------------------------------------------
Deferred income taxes 4,237 19,969 -- 24,206
---------------------------------------------------------------------------
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 165,411 23,853 (23,853) 165,411
Additional paid-in capital 229,906 928,804 (928,804) 229,906
Retained earnings 450,036 414,164 (414,164) 450,036
---------------------------------------------------------------------------
Total shareholders' equity 845,353 1,366,821 (1,366,821) 845,353
---------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 1,911,965 $ 2,566,538 $(2,554,875) $ 1,923,628
===========================================================================
72
For the years ended
-------------------------------------------------------------------------
February 2, 2001
-------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------------
STATEMENTS OF INCOME
DATA:
Net sales $ 150,932 $4,550,571 $ (150,932) $4,550,571
Cost of goods sold -- 3,299,668 -- 3,299,668
-------------------------------------------------------------------------
Gross profit 150,932 1,250,903 (150,932) 1,250,903
Selling, general and administrative 101,906 983,925 (150,932) 934,899
Litigation settlement expense 162,000 -- -- 162,000
-------------------------------------------------------------------------
Operating profit (loss) (112,974) 266,978 -- 154,004
Interest expense 18,372 26,985 -- 45,357
-------------------------------------------------------------------------
Income before taxes on income (131,346) 239,993 -- 108,647
Provisions for taxes on income (51,562) 89,567 -- 38,005
Equity in subsidiaries' earnings, net of
taxes 150,426 -- (150,426) --
-------------------------------------------------------------------------
Net income $ 70,642 150,426 $ (150,426) $ 70,642
=========================================================================
January 28,2000
-------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------------
STATEMENTS OF INCOME DATA:
Net sales $ 177,960 $3,887,964 $ (177,960) $3,887,964
Cost of goods sold -- 2,794,466 -- 2,794,466
-------------------------------------------------------------------------
Gross profit 177,960 1,093,498 (177,960) 1,093,498
Selling, general and administrative 103,673 847,215 (177,960) 772,928
-------------------------------------------------------------------------
Operating profit 74,287 246,283 -- 320,570
Interest expense 9,324 16,549 -- 25,873
-------------------------------------------------------------------------
Income before taxes on income 64,963 229,734 -- 294,697
Provisions for taxes on income 23,809 84,215 -- 108,024
Equity in subsidiaries' earnings, net of taxes 145,519 -- (145,519) --
-------------------------------------------------------------------------
Net income $ 186,673 $ 145,519 $ (145,519) $ 186,673
=========================================================================
73
January 29, 1999
-------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------------
STATEMENTS OF INCOME
DATA:
Net sales $ 189,088 $3,220,989 $ (189,088) $3,220,989
Cost of goods sold -- 2,328,470 -- 2,328,470
-------------------------------------------------------------------------
Gross profit 189,088 892,519 (189,088) 892,519
Selling, general and administrative 101,889 726,733 (189,088) 639,534
-------------------------------------------------------------------------
Operating profit 87,199 165,786 -- 252,985
Interest expense 9,236 4,740 -- 13,976
-------------------------------------------------------------------------
Income before taxes on income 77,963 161,046 -- 239,009
Provisions for taxes on income 28,729 59,346 -- 88,075
Equity in subsidiaries' earnings, net of
taxes 101,700 -- (101,700) --
-------------------------------------------------------------------------
Net income $ 150,934 $ 101,700 $ (101,700) $ 150,934
=========================================================================
For the years ended
-------------------------------------------------------------------------
February 2, 2001
-------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
DATA:
Cash flows from operating activities:
Net income $ 70,642 $ 150,426 $(150,426) $ 70,642
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization 13,144 98,255 -- 111,399
Deferred income taxes (63,911) (14,031) -- (77,942)
Tax benefit from stock option exercises 19,018 -- -- 19,018
Litigation settlement 162,000 -- -- 162,000
Change in operating assets and liabilities:
Merchandise inventories -- (59,803) -- (59,803)
Other current assets 12,206 236,946 (244,502) 4,650
Accounts payable (286,541) (5,297) 244,502 (47,336)
Accrued expenses and other 4,562 34,829 -- 39,391
Income taxes 2,485 (12,030) -- (9,545)
Other (154,550) 7,155 150,426 3,031
-------------------------------------------------------------------------
Net cash provided by / (used in)
operating activities (220,945) 436,450 -- 215,505
-------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (15,035) (201,549) -- (216,584)
Proceeds from sale of property and equipment 165 97,447 -- 97,612
Issuance of long-term notes receivable (150,932) -- 150,932 --
Receipt of dividends 343,515 -- (343,515) --
Contribution of capital (873) -- 873 --
-------------------------------------------------------------------------
Net cash used in investing activities 176,840 (104,102) (191,710) (118,972)
-------------------------------------------------------------------------
74
Cash flows from financing activities:
Issuance of short-term borrowings 220,000 -- -- 220,000
Repayments of short-term borrowings (220,000) -- -- (220,000)
Issuance of long-term obligations 199,595 150,932 (150,932) 199,595
Repayments of long-term obligations (1,251) (111,025) -- (112,276)
Payment of cash dividends (42,237) (343,515) 343,515 (42,237)
Proceeds from exercise of stock options 34,130 -- -- 34,130
Repurchase of common stock, net (62,988) -- -- (62,988)
Issuance of common stock, net -- 873 (873) --
Purchase of common stock by employee deferred
compensation trust (2,126) -- -- (2,126)
Settlement of derivative financial instruments (3,063) -- -- (3,063)
-------------------------------------------------------------------------
Net cash provided by / (used in)
financing activities 122,060 (302,735) 191,710 11,035
-------------------------------------------------------------------------
Net increase in cash and cash equivalents 77,955 29,613 -- 107,568
Cash and cash equivalents, beginning of year 42,688 12,054 -- 54,742
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 120,643 $ 41,667 $ -- $ 162,310
=========================================================================
January 28, 2000
-------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating activities:
Net income $ 186,673 $ 145,519 $(145,519) $ 186,673
Adjustments to reconcile net income to net cash
provided by / (used in) operating activities:
Depreciation and amortization 8,445 71,262 -- 79,707
Deferred income taxes (20) (2,241) -- (2,261)
Tax benefit from stock option exercises 30,287 -- -- 30,287
Change in operating assets and liabilities:
Merchandise inventories -- (158,836) -- (158,836)
Other current assets (19,847) (416,626) 421,122 (15,351)
Accounts payable 424,770 74,354 (421,122) 78,002
Accrued expenses and other 13,129 (15,273) -- (2,144)
Income taxes 2,072 2,053 -- 4,125
Other (149,396) 397 145,519 (3,480)
-------------------------------------------------------------------------
Net cash provided by / (used in)
operating activities 496,113 (299,391) -- 196,722
-------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (24,624) (117,446) -- (142,070)
Proceeds from sale of property and equipment 335 2,716 -- 3,051
Issuance of long-term notes receivable (177,960) -- 177,960 --
Contribution of capital (207,476) -- 207,476 --
-------------------------------------------------------------------------
Net cash used in investing activities (409,725) (114,730) 385,436 (139,019)
-------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term borrowings 295,324 -- -- 295,324
Repayments of short-term borrowings (295,324) -- -- (295,324)
Issuance of long-term obligations 2,351 198,457 (177,960) 22,848
Repayments of long-term obligations (2,182) (5,523) -- (7,705)
Payment of cash dividends (33,791) -- -- (33,791)
Proceeds from exercise of stock options 38,797 -- -- 38,797
Repurchase of common stock, net (50,753) -- -- (50,753)
Issuance of common stock, net -- 207,476 (207,476) --
-------------------------------------------------------------------------
Net cash provided by / (used in)
financing activities (45,578) 400,410 (385,436) (30,604)
-------------------------------------------------------------------------
Net increase / (decrease) in cash and cash
equivalents 40,810 (13,711) -- 27,099
Cash and cash equivalents, beginning of year 1,878 25,765 -- 27,643
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 42,688 $ 12,054 $ -- $ 54,742
=========================================================================
75
January 29, 1999
-------------------------------------------------------------------------
DOLLAR GENERAL GUARANTOR CONSOLIDATED
CORPORATION SUBSIDIARIES ELIMINATIONS TOTAL
-------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS DATA:
Cash flows from operating activities:
Net income $ 150,934 $ 101,700 $(101,700) $ 150,934
Adjustments to reconcile net income to net cash
Provided by / (used in) operating activities:
Depreciation and amortization 5,063 52,351 -- 57,414
Deferred income taxes (825) (3,064) -- (3,889)
Tax benefit from stock option exercises 32,252 -- -- 32,252
Change in operating assets and liabilities:
Merchandise inventories -- (171,239) -- (171,239)
Other current assets 242,095 (411,357) 158,032 (11,230)
Accounts payable 525,144 (280,489) (158,032) 86,623
Accrued expenses and other 13,857 1,074 -- 14,931
Income taxes 342 20,298 -- 20,640
Other (103,840) (605) 101,700 (2,745)
-------------------------------------------------------------------------
Net cash provided by / (used in)
operating activities 865,022 (691,331) -- 173,691
-------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (8,439) (134,943) -- (143,382)
Proceeds from sale of property and equipment 80 142 -- 222
Issuance of long-term notes receivable (64,520) (822) 65,342 --
Contribution of capital (698,768) -- 698,768 --
-------------------------------------------------------------------------
Net cash used in investing activities (771,647) (135,623) 764,110 (143,160)
-------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term borrowings 165,000 -- -- 165,000
Repayments of short-term borrowings (186,933) -- -- (186,933)
Issuance of long-term obligations 1,324 136,275 (65,342) 72,257
Repayments of long-term obligations (2,667) -- -- (2,667)
Payment of cash dividends (26,661) -- -- (26,661)
Proceeds from exercise of stock options 30,727 -- -- 30,727
Repurchase of common stock, net (73,236) -- -- (73,236)
Issuance of common stock, net -- 698,768 (698,768) --
Transfer to ESOP 755 -- -- 755
-------------------------------------------------------------------------
Net cash provided by / (used in)
financing activities (91,691) 835,043 (764,110) (20,758)
-------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,684 8,089 -- 9,773
Cash and cash equivalents, beginning of year 194 17,676 -- 17,870
-------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,878 $ 25,765 $ -- $ 27,643
=========================================================================
76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dollar General Corporation
Goodlettsville, Tennessee
We have audited the accompanying consolidated balance sheets of Dollar General
Corporation and subsidiaries as of February 2, 2001 and January 28, 2000, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended February 2, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dollar General
Corporation and subsidiaries as of February 2, 2001 and January 28, 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended February 2, 2001, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the
accompanying consolidated balance sheet as of January 28, 2000 and the related
consolidated statements of income, shareholders' equity and cash flows for the
years ended January 28, 2000 and January 29, 1999, have been restated.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Nashville, Tennessee
January 11, 2002
77
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The members of the Company's Board of Directors as of December
14, 2001, are:
Director
Name Age Since
-------------------- ---- ---------
Dennis C. Bottorff 57 1998
Barbara L. Bowles 54 2000
James L. Clayton 67 1988
Reginald D. Dickson 55 1993
E. Gordon Gee 57 2000
John B. Holland 69 1988
Barbara M. Knuckles 53 1995
Cal Turner 61 1966
David M. Wilds 61 1991
William S. Wire, II 69 1989
----------------------------------------------------------------------
The following is a summary of the business experience of the
Company's Directors:
Mr. Bottorff currently serves as Chairman of Council Capital
Management, Inc., which position he has held since January 2001. He previously
served as Chairman of AmSouth Bancorporation, a bank holding company, and prior
to that, as President and Chief Executive Officer of First American Corporation
from 1991 to 1999. He was also First American's Chairman from 1995 to 1999. Mr.
Bottorff is a director of Ingram Industries, a privately-held provider of
wholesale distribution, inland marine transportation and insurance services. He
also serves as a director of Memx, Inc., an optical systems component
manufacturer.
Ms. Bowles currently serves as President of The Kenwood Group, an
equity investment advisory firm that she founded in 1989. She also founded The
Kenwood Growth and Income Fund in 1996. She previously served as Vice President
of Kraft, Inc. from 1984 to 1989. Ms. Bowles is a director of Black & Decker
Corporation, Wisconsin Energy Corporation, Georgia Pacific Corp., and the
Chicago Urban League. She is also a trustee of Fisk University.
78
Mr. Clayton has served as Chairman of Clayton Homes, Inc. since
1956 and also served as its Chief Executive Officer from 1956 to 1999. Clayton
Homes, Inc. manufactures, sells, finances and insures manufactured homes. Mr.
Clayton is Chairman and Chief Executive Officer of FSB Bank Shares, Inc., a bank
holding company, and is a Director and Regional Chairman of Branch Banking and
Trust Co. Additionally, Mr. Clayton is a director of Chateau Communities, Inc.,
a manufactured housing property management real estate investment trust.
Mr. Dickson has served as Chairman of Buford, Dickson, Harper &
Sparrow, Inc., Investment Advisors, and President Emeritus of Inroads, Inc., a
non-profit organization supporting minority education since 1996. Mr. Dickson
served as President and Chief Executive Officer of Inroads, Inc. from 1983 to
1993.
Dr. Gee has served as Chancellor of Vanderbilt University since
2000. He previously served as President of Brown University from 1998 until
2000. Prior to that, Dr. Gee served as President of The Ohio State University
from 1990 until 1998. Dr. Gee is a director of The Limited, Inc., Intimate
Brands, Inc., Allmerica Financial Corp., Hasbro, Inc., and Massey Energy, Inc.
Mr. Holland served as President and Chief Operating Officer of
Fruit of the Loom, Inc., a manufacturer of underwear and other soft goods, from
1985 until his retirement in February 1996, at which time he became a consultant
to that corporation. In 1999, Mr. Holland returned to Fruit of the Loom as a
director and Executive Vice President, Operations. Fruit of the Loom filed a
petition for bankruptcy on December 29, 1999. Mr. Holland also serves as
President of Dunree Capital, Inc.
Ms. Knuckles has served as Director of Development and Corporate
Relations for North Central College in Naperville, Illinois since 1992. From
1988 to 1992, Ms. Knuckles was a private investor managing several family
businesses. She serves as a member of the board of directors of J. R. Short
Milling Company, a privately-held specialty corn-milling company, and Harris
Bank of Naperville, Illinois.
Mr. Turner is the Chairman and Chief Executive Officer of the
Company. He joined the Company in 1965 and has held the office of Chief
Executive Officer since 1977. Mr. Turner became Chairman of the Board in 1989
and President in 1977.
Mr. Wilds currently serves as Managing Partner of 1st Avenue
Partners, L.P., a private equity partnership, which position he has held since
1998. From 1995 to 1998, Mr. Wilds was President of Nelson Capital Partners III,
L.P., a merchant banking company. From 1990 to 1995, Mr. Wilds served as
Chairman of the Board of Cumberland Health Systems, Inc., an owner and operator
of psychiatric hospitals.
Mr. Wire served from 1986 until his retirement in 1994 as
Chairman of the Board of Genesco, Inc., a manufacturer, wholesaler and retailer
of footwear and clothing. Mr. Wire served as Chief Executive Officer of Genesco,
Inc. from 1986 to 1993. Mr. Wire is a director of Genesco, Inc. and American
Endoscopy Services, Inc.
79
Executive Officers
The Company's executive officers as of December 14, 2001, are:
Executive
Officer
Name Age Position Since
----------------------------------------------------------------------------
Cal Turner 61 Chairman and 1966
Chief Executive Officer
Donald S. Shaffer 58 President and 2001
Chief Operating Officer
Bruce Ash 52 Vice President, 1999
Information & Administrative Services
Melissa Buffington 43 Vice President and 1999
Chief Administrative Officer
Jim Hagan 42 Executive Vice President and 2001
Chief Financial Officer
Tom Hartshorn 50 Executive Vice President, 1992
Merchandising
Bob Layne 35 Vice President 2001
Merchandising Support
Stonie O'Briant 46 Executive Vice President, 1995
Operations
Robert A. Lewis 40 Vice President, Controller 2001
Jeff Sims 50 Vice President, 1999
Distribution
Bob Warner 51 Vice President, 1998
General Merchandising Manager
All executive officers of the Company serve at the pleasure of
the Board of Directors. Messrs. Turner, Hartshorn and O'Briant have been
employed by the Company as executive officers for more than the past five years.
The following is a brief summary of the business experience of
the executive officers:
80
Mr. Turner joined the Company in 1965 and was elected President
and Chief Executive Officer in 1977. Mr. Turner has served as Chairman of the
Board and Chief Executive Officer since January 1989.
Mr. Shaffer joined the Company as President and Chief Operating
Officer in May 2001. From 2000 to 2001, Mr. Shaffer served as President and
Chief Executive Officer of Heilig-Meyers Company, a retailer of home furnishings
and bedding, and as its President and Chief Operating Officer from 1999 to 2000.
Heilig-Meyers Company filed a petition for bankruptcy on August 16, 2000. From
1997 to 1998, Mr. Shaffer served as Chairman and Chief Executive Officer of
Western Auto Supply Company, a wholesaler of automative parts and a subsidiary
of Sears, Roebuck and Co. From 1994 to 1996, Mr. Shaffer served as President and
Chief Executive Officer of Sears Canada Inc., a retailer of general merchandise
and a majority-owned subsidiary of Sears, Roebuck and Co.
Mr. Ash joined the Company as Vice President, Information
Services in September 1999. Before joining the Company, Mr. Ash served as Senior
Vice President of Systems at Talbot's, a retailing company, for 10 years.
Ms. Buffington was named Vice President and Chief Administrative
Officer in February 2001. She joined the Company as Vice President, Human
Resources in November 1999. Before joining the Company, Ms. Buffington served as
Executive Vice President, Human Resources of First American Corporation, a bank
holding company. Ms. Buffington joined First American in 1992 as Vice President,
Strategic Planning.
Mr. Hagan joined the Company as Executive Vice President and
Chief Financial Officer in March 2001. From June 2000 through March 2001, Mr.
Hagan served as Chief Financial Officer of Central Parking Corporation, a
provider of parking and transportation management services. From April 1999
through June 2000, Mr. Hagan served as Executive Vice President and Chief
Financial Officer of Saturn Retail Enterprises, an owner/operator of Saturn
automobile dealerships and a wholly owned indirect subsidiary of General Motors
Corporation. He served as Executive Vice President and Chief Financial Officer
of Bruno's Inc., a supermarket operator, from May 1996 through April 1999, which
company filed a petition for bankruptcy in January of 1998. Mr. Hagan also
previously served as Executive Vice President and Chief Financial Officer of
Revco D.S., Inc.
Mr. Hartshorn was named Executive Vice President, Merchandising
in February 2001. Since February 2000, he served as Senior Vice President,
Logistics and Merchandising Operations. He joined the Company as Vice President,
Operations in 1992 and was named Vice President, Merchandising Operations in
1993. Before joining the Company, he was director of store operations for
McCrory/TG&Y, a retailing company, where he held various management positions in
operations since 1968.
81
Mr. Layne was named Vice President, Merchandising Support in
February 2001. He joined the Company in 1985 and served various positions
including staff attorney, senior director of administration and most recently,
Corporate Secretary.
Mr. O'Briant was named Executive Vice President, Operations in
February 2001. Since February 2000, he served as Executive Vice President,
Merchandising. Mr. O'Briant joined the Company in 1991 as Hardlines Merchandise
Manager, was named General Merchandise Manager in 1992, Vice President,
Merchandising in 1995, and Senior Vice President, Merchandising in 1998. Before
joining Dollar General, Mr. O'Briant had 17 years of service with Fred's, Inc.,
a discount retailer, where he served in a number of executive management
positions including Vice President, Hardlines, Vice President, Softlines and
Vice President, Household Products.
Mr. Lewis joined the Company as Vice President, Controller in
October, 2001. From May 1999 through September 2001, Mr. Lewis served as Group
Vice President, overseeing operational, planning and administrative functions
for Lux Corp., an apparel retailer doing business as "Mr. Rags" and a wholly
owned subsidiary of Claire's Stores, Inc. Mr. Lewis served as Vice President of
Finance from 1996 until May 1999, and as Controller from November 1988 until May
1999, for Claire's Stores, Inc., a retailer of popular-priced fashion
accessories and apparel.
Mr. Sims was named Vice President, Distribution in March 1999.
Before joining the Company, Mr. Sims served with Hills Department Stores, a mass
merchandising company, in various management positions including Senior Vice
President, Logistics from 1997 to 1999. From 1995 to 1996, Mr. Sims served as
Vice President, Logistics for Thorn Services International, a rent-to-own
services company. From 1992 to 1994, Mr. Sims served as Vice President,
Logistics for Lesco, Inc., a manufacturer and distributor of industrial
products.
Mr. Warner was named Vice President, General Merchandising
Manager in November 1998. Mr. Warner joined the Company in 1989 as a hardware
buyer. Mr. Warner has held various management positions with the Company
including Hardlines Divisional Merchandise Manager, Director of Products and
Processes and General Merchandise Manager.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act and the disclosure requirements of
Item 405 of Regulation S-K of the Rules and Regulations of the SEC require the
Company's executive officers and directors, and any person who owns more than
10 percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC,
the applicable market or exchange upon which the Company's shares are listed
and the Company. Based solely on the Company's review of copies of such forms it
82
has received and based on written representations from certain reporting persons
that they were not required to file Forms 5 for specified fiscal years, the
Company believes that all its officers, directors and greater-than-ten-percent
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during the Company's 2000 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information as to annual, long-term
or other compensation paid or accrued during 2000, 1999 and 1998, for the CEO
and the persons who, at the end of 2000, were the other four most
highly-compensated executive officers of the Company (collectively, the "Named
Executive Officers") or those who are otherwise required to be included in this
table.
83
===================================================================================================================================
Long-term
Annual Compensation Compensation Awards
------------------------------------- ---------------------------
Name and Principal Position Year Salary ($) Bonus ($) Other Annual Restricted Securities
Compensation Stock Underlying All Other
($)(1) Awards ($) Options (#)(2) Compensation(3)
------------------------------- -------- ------------ ---------- -------------- ----------- -------------- -----------------
Cal Turner, Jr., Chairman and 2000 775,029 356,500 22,080 0 205,168 166,084
Chief Executive Officer 1999 766,667 485,750 12,866 0 205,995 156,782
1998 704,167 528,000 8,153 0 209,608 151,410
------------------------------- -------- ------------ ---------- -------------- ----------- -------------- -----------------
Brian Burr, Executive Vice 2000 333,346 149,500 56,444 0 66,061 26,843
President and Chief Financial 1999 320,833 88,500 16,704 0 88,375 19,951
Officer(4) 1998 137,500 0 0 0 180,541 0
------------------------------- -------- ------------ ---------- -------------- ----------- -------------- -----------------
Bob Carpenter, President and 2000 337,512 126,500 19,049 0 164,555 51,551
Chief Operating Officer(5) 1999 270,833 147,500 13,664 0 74,159 39,219
1998 230,833 138,000 8,738 0 67,430 32,150
------------------------------- -------- ------------ ---------- -------------- ----------- -------------- -----------------
Tom Hartshorn, Executive Vice 2000 201,674 85,100 3,584 0 96,340 21,785
President, Merchandising 1999 181,249 100,300 4,081 0 48,750 7,731
1998 167,083 110,400 3,502 0 48,961 4,177
------------------------------- -------- ------------ ---------- -------------- ----------- -------------- -----------------
Stonie O'Briant, Executive Vice 2000 245,842 103,500 5,758 0 66,061 21,139
President, Operations 1999 219,167 112,100 4,059 0 74,159 19,995
1998 186,667 117,300 2,525 0 135,975 18,404
------------------------------- -------- ------------ ---------- -------------- ----------- -------------- -----------------
Earl Weissert Executive Vice 2000 297,510 170,000 23,463 0 66,061 32,270
President, Operations(6) 1999 201,875 0 93,467 0 121,229 0
1998 0 0 0 0 0 0
=============================== ======== ============ ========== ============== =========== ============== =================
Options Granted in Last Fiscal Year
The following table provides information as to options granted to
the Named Executive Officers during 2000. The Company granted no Stock
Appreciation Rights in 2000, and no Named Executive Officer holds any Stock
Appreciation Rights.
---------------------------------
(1) The amounts reported in this column include gross-ups for tax
reimbursements and $42,831 reimbursed to Mr. Burr for relocation expenses
in 2000.
(2) Includes options granted under the Stock Plus program, which awards grants
to key employees who maintain a specified level of stock ownership, as
well as options granted under the Stock Incentive Program which are tied
to employee and company performance. All share amounts have been adjusted
to reflect all common stock splits as of the date of this report.
(3) Includes contributions to retirement and deferred compensation plans in
2000, 1999 and 1998.
(4) Mr. Burr left the Company in February 2001.
(5) Mr. Carpenter retired effective as of October 1, 2001.
(6) Mr. Weissert left the Company in January 2001.
===============================================================================================================================
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
for
Individual Grants Option Term
------------------------------------------------------------------------------ ------------------------------
Number of % of Total Exercise
Securities Options or Base
Underlying Options Granted to Price Expiration
Name Granted (#)(7 ) Employees In 2000 (%) ($/Share) Date 5% ($) 10% ($)
----------------- --------------------- ---------------------- ------------------ -------------- -------------- ---------------
Cal Turner, Jr. 109,425 3.54 $ 21.25 4/4/2010 1,462,357 3,705,899
54,712 $ 21.25 4/4/2010 731,172 1,852,933
41,031 $ 17.31 6/5/2010 446,670 1,131,950
----------------- --------------------- ---------------------- ------------------ -------------- -------------- ---------------
Brian Burr 33,593 1.14 $ 21.25 4/4/2010 448,937 1,137,695
16,793 $ 21.25 4/4/2010 224,422 568,729
15,675 $ 17.31 6/5/2010 170,641 432,437
----------------- --------------------- ---------------------- ------------------ -------------- -------------- ---------------
2.84
Bob Carpenter 25,713 $ 14.65 2/21/2010 236,902 600,356
12,861 $ 14.65 2/21/2010 118,492 300,283
19,040 $ 14.65 2/21/2010 175,421 444,552
9,523 $ 14.65 2/21/2010 87,738 222,346
74,125 $ 21.25 4/4/2010 990,607 2,510,393
23,293 $ 17.31 6/5/2010 253,571 642,600
----------------- --------------------- ---------------------- ------------------ -------------- -------------- ---------------
Tom Hartshorn 9,852 1.66 $ 14.65 2/21/2010 90,769 230,028
4,921 $ 14.65 2/21/2010 45,339 114,897
13,553 $ 14.65 2/21/2010 124,868 316,440
6,772 $ 14.65 2/21/2010 62,393 158,115
33,593 $ 21.25 4/4/2010 448,937 1,137,695
16,793 $ 21.25 4/4/2010 224,422 568,729
10,856 $ 17.31 6/5/2010 118,180 299,492
----------------- --------------------- ---------------------- ------------------ -------------- -------------- ---------------
1.14
Stonie O'Briant 33,593 $ 21.25 4/4/2010 448,937 1,137,695
16,793 $ 21.25 4/4/2010 224,422 568,729
15,675 $ 17.31 6/5/2010 170,641 432,437
----------------- --------------------- ---------------------- ------------------ -------------- -------------- ---------------
Earl Weissert 33,593 1.14 $ 21.25 4/4/2010 448,937 1,137,695
16,793 $ 21.25 4/4/2010 224,422 568,729
15,675 $ 17.31 6/5/2010 170,641 432,437
================= ===================== ====================== ================== ============== ============== ===============
------------------------------
(1) Options granted under the Stock Incentive Program will vest nine and
one-half years from the date of grant. These options may vest on an
accelerated basis upon the attainment of individual and Company
performance goals. Each Named Executive Officer met Company stock
ownership requirements to receive additional grants under the Stock Plus
Program. Option grants for each Named Executive Officer are listed in the
following order: (1) Stock Incentive Program grants which for purposes of
accelerated vesting are tied to earnings goal one, (2) Stock Incentive
Program grants which for purposes of accelerated vesting are tied to
earnings goal two and (3) Stock Plus Program grants. All share amounts and
prices have been adjusted to reflect all common stock splits as of the
date of this report.
85
Aggregated Option Exercises in the Last Fiscal Year and Year-End Values
The following table provides information as to options exercised
or held by the Named Executive Officers during 2000.
======================================================================================================================
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at Fiscal Year-End
Options at Fiscal Year End ($)
----------------------------------------------------------------------------------------------------------------------
Shares
Acquired on Value
Exercise Realized
Name (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
----------------- -------------- ------------- ----------------- ----------------- ----------------- -----------------
Cal Turner, Jr. 357,621 2,443,516 41,200 864,542 0 4,739,865
----------------- -------------- ------------- ----------------- ----------------- ----------------- -----------------
Brian Burr 0 0 142,160 192,813 244,839 138,135
----------------- -------------- ------------- ----------------- ----------------- ----------------- -----------------
Bob Carpenter 0 0 398,000 377,354 4,549,116 1,803,830
----------------- -------------- ------------- ----------------- ----------------- ----------------- -----------------
Tom Hartshorn 50,000 870,975 388,814 246,879 4,710,304 1,232,515
----------------- -------------- ------------- ----------------- ----------------- ----------------- -----------------
Stonie O'Briant 142,712 2,100,002 172,916 255,250 814,101 1,015,369
----------------- -------------- ------------- ----------------- ----------------- ----------------- -----------------
Earl Weissert 0 0 18,750 0 0 0
================= ============== ============= ================= ================= ================= =================
Employee Retirement Plan
The Dollar General Corporation 401(k) Savings and Retirement Plan
(the "401(k) Plan") became effective on January 1, 1998. Balances in two earlier
plans were transferred into the 401(k) Plan.
The Company makes a discretionary annual contribution, which has
generally been equal to 2% of each eligible employee's compensation.
Seventy-five percent of this contribution will be made in cash, while the
remaining twenty-five percent will be contributed in the Company's Common Stock.
Eligible employees are not required to make any additional contributions in
order to receive this contribution from the Company. However, participants may
elect to contribute between 1% and 15% of their annual salary, up to a maximum
annual contribution of $10,500. The Company will match fifty percent of employee
contributions, up to 6% of annual salary.
------------------------------
(1) Market value of underlying securities at exercise, minus the exercise
price.
86
The 401(k) Plan covers substantially all employees, including the
Named Executive Officers, subject to certain eligibility requirements. The
401(k) Plan is subject to the Employee Retirement and Income Security Act
("ERISA").
A participant's right to claim a distribution of his or her
account balance is dependent on ERISA guidelines, Internal Revenue Service
regulations and the vesting schedule below:
Employee Contributions Immediately Vested
Dollar General Discretionary
Contribution (2%) Immediately Vested
Employer Matching Contribution At the end of the 1st - 3rd Years 0% Vested
At the end of the 4th Year 40% Vested
At the end of the 5th Year 100% Vested
As of February 2, 2001, Messrs. Turner, Carpenter, Burr,
O'Briant, Hartshorn and Weissert had 35, 19, 2, 9, 9 and 1 years of credited
service, respectively. The estimated present value of benefits under the plan as
of January 1, 2001, was $723,768 for Cal Turner, Jr.; $343,971 for Bob
Carpenter; $200,117 for Brian Burr; $125,709 for Stonie O'Briant; $122,817 for
Tom Hartshorn; and $12,592 for Earl Weissert. Upon retirement, each participant
has the option of taking a lump sum or an average annual payment over a 10-year
period.
Other Executive Benefits
The Company offers the Supplemental Executive Retirement Plan
(the "SERP") and Compensation Deferral Plan (the "CDP") to certain key employees
who are determined to be eligible by the CGC Committee. Pursuant to the CDP,
participants make annual elections to defer up to 100% of base pay, reduced by
any deferrals to the qualified plan, and up to 100% of bonus. All participants
are 100% vested for all compensation deferrals. Pursuant to the SERP, the
Company makes an annual contribution to all participants who are actively
employed on December 31. The contribution percentage is based on age plus
service where:
Age plus Service Percent of Base plus Bonus
---------------- --------------------------
Non-Officer Officers
----------- --------
<40 2.0% 3.0%
40-59 3.0% 4.5%
60-79 5.0% 7.5%
80 or more 8.0% 12.0%
Participants have actual investment funds to choose from which
mirror the investment options available in the 401(k) Plan. The SERP is
87
non-qualified and is, therefore, not subject to certain requirements under
ERISA. The estimated present value of benefits under the SERP and CDP as of
January 1, 2001, was $4,528,108 for Cal Turner, Jr.; $668,307 for Bob Carpenter;
$165,393 for Brian Burr; $332,748 for Stonie O'Briant; $117,815 for Tom
Hartshorn; and $44,224 for Earl Weissert.
Compensation of Directors
Directors receive a $5,000 quarterly retainer plus $1,250 for
attending each regular meeting of the Board of Directors or any committee
thereof. Committee chairpersons receive an additional $250 for each committee
meeting attended. Compensation for telephonic meetings is one-half the above
rates. Directors who are officers of the Company do not receive any separate
compensation for attending Board or committee meetings. In addition, the
directors who are not employees of the Company are entitled to receive
nonqualified options for the purchase of Common Stock pursuant to the Company's
1998 Stock Incentive Plan.
A non-employee director may defer all or a part of any fees
normally paid by the Company to the director pursuant to a voluntary
nonqualified compensation deferral plan. The compensation eligible for deferral
includes the annual retainer, meeting and other fees, as well as any per diem
compensation for special assignments, earned by a director for his or her
service to the Board or one of its committees. The compensation deferred is
credited to a liability account, which is then invested at the option of the
director, in either an account which mirrors the performance of a fund selected
by the CGC Committee, or in a phantom stock account which mirrors the
performance of the Common Stock. In accordance with a director's election made
at the time of the deferral, the deferred compensation will be paid in a lump
sum or in annual installments, or a combination of both upon a director's
resignation or termination from the Board. All deferred compensation will be
immediately due and payable upon a "change in control" (as defined in the
deferred compensation plan) of the Company.
Compensation Committee Interlocks and Insider Participation
During 2000, the Executive Compensation and Corporate Governance
Committee of the Board of Directors (the "CGC Committee") was comprised of
Messrs. Bottorff, Gee, Wilds and Wire. None of these persons has at any time
been an officer or employee of the Company or any subsidiary of the Company
during 2000. No executive officer of the Company served as a member of a
compensation committee or as a director of any entity of which any of the
Company's directors served as an executive officer.
88
Report of the Executive Compensation and Corporate Governance
Committee of the Board of Directors on Executive Compensation
The Executive Compensation and Corporate Governance Committee
prepared the following executive compensation report:
What is the Company's compensation philosophy?
The Company has adopted the concept of pay-for-performance,
linking management compensation, Company performance and shareholder return.
This strategy reflects the Company's desire to reward results that are
consistent with the key goals of the Company and its shareholders. The CGC
Committee and the Company believe that combining the variable, direct and
indirect pay components of the Company's compensation program enables the
Company to attract, retain and motivate result-oriented employees to achieve
higher levels of performance.
What is the Company's variable compensation philosophy?
At nearly all levels of the Company, a significant portion of pay
is variable, being contingent upon Company (or store unit) performance. The
performance-based component, whether annual or long-term incentive, is
significant enough to serve as a strong incentive for excellent performance.
Additionally, performance-based compensation, through the grants of stock
options to employees, serves to increase employee ownership of the Company.
What is the Company's direct compensation philosophy?
Though performance-based compensation is emphasized, base pay is
competitive. The Company believes base pay should relate to the skills required
to perform a job and to the value of each job performed relative to the
industry, the market and the job's strategic importance to the Company. This
method of valuation allows the Company to respond to changes in its employment
needs and changes in the labor market. Increases in base pay require a
satisfactory or better level of performance as approved by the CGC Committee.
What is the Company's indirect compensation philosophy?
The Company's indirect compensation programs are intended to
protect employees from extreme financial hardship in the event of a catastrophic
illness or injury and to provide limited income security for retirement years.
The Company believes that its health, life and disability benefit programs
should provide competitive levels of protection without jeopardizing the
Company's position as a low-cost retailer. The Company manages health-care costs
aggressively and enlists employee assistance in cost management. Employees have
89
various opportunities to share in health-care cost reductions and are encouraged
to adopt healthy lifestyles.
The Company believes its retirement plans should provide limited
income security at retirement for the typical employee. Employees are also
invited to share in ownership of the Company through participation in the Dollar
General Direct Stock Purchase Plan and the Dollar General Corporation 401(k)
Savings and Retirement Plan.
How are the Company's officers compensated?
Under the supervision of the CGC Committee, the Company has
developed compensation policies and programs designed to provide competitive
levels of compensation that integrate pay with the Company's annual and
long-term performance goals. The Company is committed to creating an incentive
for its employees that encourages a team approach to accomplish corporate
objectives and to create value for shareholders.
The executive officers' compensation for 2000 reflected the
Company's increasing emphasis on tying pay to both short-term and long-term
incentives. The short-term incentive is an annual cash bonus that is based on
company performance and linked to a percentage of the executive officer's
salary. The long-term incentives are performance-accelerated stock options.
Incentive pay awarded to the Chief Executive Officer and the other Named
Executive Officers is determined by Company performance goals that are
established annually. The CGC Committee's approach to base compensation is to
offer competitive (although slightly lower than median) salaries to the Chief
Executive Officer and the other Named Executive Officers in comparison with
market practices. Base salaries have become a relatively smaller component of
the total executive officer compensation package as compared with the Company's
pay-for-performance component. The 2000 average base salaries for the Named
Executive Officers (not including the Chief Executive Officer) increased 13%
over 1999 base salaries. (Note:
This included increases in salary due to promotions of three of the incumbents
during the year.)
How does the Company determine the CEO's and the other Named
Executive Officers' salary increases?
The increase in base salaries in 2000 was determined based upon:
90
o a review of peer group comparison data (using the
peer group compensation survey published by
Hewitt, formerly known as the MCS survey);* and
o the subjective analysis of the CGC Committee,
after evaluating the recommendations, peer group
data, the Company's overall performance, and the
respective individual performance criteria of the
Chief Executive Officer and the other Named
Executive Officers.
Please explain the Company's annual cash bonus program.
The Company's annual cash bonus program for the executive
officers makes up the short-term incentive component of the executive officers'
cash compensation. The payment of annual cash bonuses is based on both objective
and subjective criteria. All full-time employees are eligible to receive a cash
bonus.
Objective criteria for executive officers and corporate office
employees include actual earnings improvement goals established by the CGC
Committee at the end of the prior fiscal year. The Company uses earnings
improvement for determining target goals for the executive officers' variable
pay for two primary reasons: first, it is a defined measure of total Company
performance; and second, it is a measure that can be easily identified and
reviewed by shareholders. The objective criteria for field-based employees are
primarily based upon store performance.
In order for an executive officer or corporate office employee to
receive a cash bonus under the cash bonus program effective for 2000, the
Company had to meet CGC Committee-established earnings improvement goals, each
exceeding the prior year's performance. For executive officers, if the Company
reached the "target" goal, which was considered by the CGC Committee to be
challenging, then 25% of salary was to be awarded to each executive officer as a
cash bonus. If the Company reached the "stretch" goal, which was considered by
the Committee to be extremely challenging, then 75% of salary was to be awarded
to each executive officer as a cash bonus. The percentage of salary awarded for
earnings performance falling between the "target" and "stretch" goals is on a
graduated scale (from 26% of salary to 74% of salary) commensurate with the
earnings improvement over the prior year.
Subjective performance criteria include the results of each
employee's annual performance and productivity improvement reviews. Each
employee's performance is reviewed pursuant to the Company's Performance Review
------------------------------
* The peer group compensation survey is published annually by
Hewitt (formerly known as the MCS survey). The 2000 survey included the
following mass-merchandising companies: Ames Department Stores, Consolidated
Stores, K-Mart Stores, Target Stores, Garden Ridge, Shopko Stores, Ross Stores,
TJX Companies, Value City and Wal-Mart Stores. For the past eleven years, the
Company has used this well-known peer-group annual salary survey when reviewing
and establishing the Company's executive compensation policies. Because the
Company uses this survey for executive compensation comparison, and because the
Company ties executive compensation directly to Company performance, the same
peer group survey, with the exception of those companies that are not publicly
traded (and for which stock comparison data is therefore unavailable), is used
for Company performance comparison purposes.
91
Process. The Performance Review Process is a comprehensive program that focuses
on total performance improvement by concentrating on development goals that tie
to performance improvement areas identified in the performance review.
Development goals emphasize skill enhancement, leadership development,
performance improvement and career goal aspirations of employees. Performance
goals focus on the key results required to actively pursue the Company's
mission. Development and performance goals are set annually for each management
employee with the employee's supervisor, and the payment of an annual bonus is
dependent upon the employee achieving his/her individual goals. That is, Company
performance is not the sole criterion by which an employee's annual cash bonus
payout is determined. Two factors determine whether an employee receives an
annual cash bonus: (a) the Company must achieve an established earnings goal;
and (b) the individual must achieve a satisfactory performance evaluation based
upon the above-described Performance Review Process factors. Therefore, equal
weight is given to each of these factors.
Based on performance during 2000, executive officers will not
receive a cash bonus in 2001. Executive officers received 46% of their annual
salaries as cash bonuses in
1999.
Please explain the Company's Employee Stock Incentive Program.
The Company grants non-qualified stock options under the 1998
Stock Incentive Plan. Stock options are awarded to the executive officers,
department directors, field management (including store managers and assistant
store managers) and other personnel considered to be in key positions, as
approved by the CGC Committee. The Company uses stock options as an incentive
for outstanding performance and to encourage stock ownership.
Executive officers, department directors and other key employees
receive "performance-accelerated" stock options with annual accelerated-vesting
schedules tied to the achievement of corporate performance goals (as measured by
earnings improvement) and individual performance goals (as measured by the
Performance Review Process).
In 2000, because the Company did not meet its stock option
program performance goals, the eligible employees did not vest on an accelerated
basis in the options under this program. In 1999, each eligible employee vested
in the maximum number of options, which could vest on an accelerated basis under
this program because (1) the Company met its stock option program earnings goals
and (2) each eligible employee achieved his or her previously established
performance goals.
92
What is a "performance-accelerated" stock option?
To further encourage outstanding performance, the CGC Committee
adopted a compensation program that ties the acceleration of stock option
vesting to earnings goals. Each eligible employee receives stock option grants
with a nine-and-one-half year vesting schedule. However, if the eligible
employee meets his/her individual goals and the Company meets or exceeds its
established earnings goal, then the stock option grant tied to that goal will
vest on an accelerated basis.
How does the Company determine how many stock options to grant?
In determining the number of the shares subject to stock options
granted to the employees eligible to participate in the stock incentive plans,
the CGC Committee takes into account the employees' scope of accountability,
their strategic and operational responsibilities and competitive compensation
data.
How does the Company encourage officers to own Company stock?
The CGC Committee established a stock option program called the
Stock Plus Program. This program, which is composed of option grants under the
1993 Employee Stock Incentive Plan, the 1995 Employee Stock Incentive Plan and
the 1998 Stock Incentive Plan, awards executive officers and other key
employees, as determined by the CGC Committee, additional stock options as an
incentive for meeting Company stock ownership targets. Stock ownership targets
are generally equal to at least two-and-one-half times salary and must be
maintained for at least a year prior to receiving a Stock Plus grant. The Chief
Executive Officer is required to maintain ownership of four times his salary to
be eligible to participate in this program. In 2000 and 1999, each executive
officer vested in the maximum number of Stock Plus Program options.
How is the Chief Executive Officer compensated?
As with the other executive officers, the CEO's compensation
reflects the Company's increasing emphasis on tying compensation to both
short-term and long-term performance. When determining the CEO's salary, the CGC
Committee considers the CEO's prior-year performance and expected future
contributions to the Company as well as peer-industry survey results published
annually. The CEO's annual salary for 2000 was 4% lower than the median of the
industry comparison group. The CEO did not receive an increase in his annual
salary in 2000.
The CGC Committee believes the CEO should have some compensation
at risk in order to encourage performance that maximizes shareholder return;
therefore, it has created a significant opportunity for additional compensation
through performance-accelerated incentives. The performance-accelerated
compensation for which the CEO is eligible takes the form of both short-term and
long-term incentives. Like other executive officers, the CEO is eligible for a
93
cash bonus (the short-term incentive component) based on the attainment of
individual goals and Company earnings improvement goals. Also like other
executive officers, the CEO is eligible for Stock Incentive Program
non-qualified performance-accelerated stock options and stock-ownership-based
Stock Plus Program stock options (the long-term incentive component). The Stock
Incentive Program stock options, which have a nine-and-one-half year vesting
schedule, can be accelerated to an earlier vesting date if certain CGC
Committee-established Company earnings improvement goals and individual
performance goals are achieved.
The CGC Committee believes that in order to maximize the CEO's
performance, a substantial portion of the CEO's compensation should be tied
directly to overall Company performance. Consistent with this philosophy, the
CGC Committee has established a salary for the CEO that is at or below the
median for CEOs of the peer-group compensation survey participants and has
emphasized the pay-for-performance components of the CEO's total compensation
package. When determining the pay-for-performance component of the CEO's
compensation package, the CGC Committee takes into consideration prior
pay-for-performance awards. The CGC Committee determined that based on the CEO's
individual performance and the performance of the Company, it was important to
continue its incentive compensation program in a manner that is competitive in
the industry and that continues to motivate and reward outstanding performance.
Under the Company's short-term incentive program (the cash bonus
component), the CEO's total possible cash-bonus incentive is 100% of his salary.
To be eligible for a cash bonus, the CEO must achieve personal performance goals
established by the CGC Committee, and the Company must meet at least one of its
earnings improvement goals. If the CEO meets his individual performance goals
and the Company meets its CGC Committee-established cash bonus program "target"
goal, the CEO will receive a cash bonus equal to 25% of his annual salary. If
the CEO's individual goals are met and the CGC Committee-established cash bonus
program "stretch" earnings goal is met, then the CEO will receive a cash bonus
equal to 100% of his annual salary. The percentage of salary awarded for
earnings performance falling between the "target" and "stretch" goals is on a
graduated scale (from 26% to 99% of salary) commensurate with the earnings
performance.
Because the Company did not meet the target earnings goal set for
2000, the CEO did not receive a cash bonus that would have been paid in 2001.
Because the Company exceeded its "target" earnings goal set for 1999, but did
not achieve its "stretch" earnings goal established for awarding cash bonus, the
CEO's short-term incentive compensation program rewarded the CEO with a cash
bonus (paid in 2000) of 46% of his annual salary.
94
The CEO's long-term incentive compensation program for 2000
rewarded the CEO with stock option grants up to approximately three to
four-and-one-half times his annual salary. In 2000, because the CGC
Committee-established stock option program goals were not met, the CEO will not
vest in any shares available in his stock option grants on an accelerated basis.
The CEO also participates in the Company's Stock Plus program.
This program rewards the CEO with additional stock options if he maintains a
level of Company stock ownership equal to at least four times his salary.
How is the Company addressing Internal Revenue Code limits on the
deductibility of executive compensation?
The Omnibus Budget Reconciliation Act of 1993 (the "Act") places
a $1,000,000 limit on the amount of certain types of compensation for each of
the Company's executive officers that will be considered tax deductible. The
Company believes that its stock plans, under which stock option grants were made
to the executive officers, comply with the Internal Revenue Service's
regulations on the deductibility limit. The Company currently has an agreement
with the CEO that will result in the deferral of non-performance-related
compensation in excess of the $1,000,000 limit to a year in which the limit
would not be exceeded. The Company continues to consider modifications to other
compensation programs in light of the Act.
William S. Wire, II - Chairman
David M. Wilds
Dennis C. Bottorff
E. Gordon Gee
Common Stock Performance
The following performance graph compares the Company's cumulative
total shareholders' return during the previous five years with a performance
indicator of the overall stock market and the Company's peer group. For the
overall stock market performance indicator, the Company uses the S&P 500 Index.
For the peer group stock market performance indicator, the Company uses the
stock market results of the publicly held participants of the compensation
survey published by Hewitt used by the CGC Committee when reviewing and
establishing the Company's executive compensation policies. See "Report of the
Executive Compensation and Corporate Governance Committee of the Board of
Directors on Executive Compensation.
95
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG DOLLAR GENERAL CORPORATION, THE S&P 500 INDEX
AND A PEER GROUP
[GRAPHIC - CHART PLOTTED POINTS TABLE LISTED BELOW]
Cumulative Total Return
------------------------------------------------------------------------
1/96 1/97 1/98 1/99 1/00 1/01
DOLLAR GENERAL CORPORATION 100.00 156.86 289.23 311.16 332.89 384.05
S&P 500 100.00 126.34 160.34 212.43 234.41 232.30
PEER GROUP 100.00 126.42 205.62 417.85 502.88 532.64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information concerning
persons who, as of December 14, 2001, were known by management to be beneficial
owners of more than five percent of the Company's common stock. Unless otherwise
indicated, each person for whom information is provided had sole voting and
investment power over the shares of common stock listed opposite his or her
name.
96
Amount and
Nature of Percent of
Name and Address of Beneficial Shares
Beneficial Owner Ownership Outstanding
-------------------------------------------------------------------------------
Cal Turner, Jr. 48,148,818(1) 14.9%
100 Mission Ridge
Goodlettsville, TN 37072-2170
James Stephen Turner 41,087,516(2) 12.7%
138 Second Avenue
Nashville, TN 37201
Turner Children Trust(3) 31,625,784 9.51%
dated January 21, 1980,
Cal Turner, Jr. and James Stephen Turner,
Co-Trustees
100 Mission Ridge
Goodlettsville, TN 37072-2170
Capital Research and Management Company 31,133,000(4) 9.36%
333 South Hope Street
Los Angeles, CA 90071
Wellington Management Company, LLP 24,626,675(5) 7.40%
75 State Street
Boston, MA 02109
Security Ownership by Officers and Directors
The following table sets forth certain information as of December 14, 2001,
concerning all directors and nominees, the executive officers named in the
Summary Compensation Table (the "Named Executive Officers") and all executive
officers and directors as a group. Unless otherwise indicated, the persons for
whom information is provided had sole voting and investment power over the
shares of Common Stock beneficially owned. Computations are based on 332,577,284
shares of Common Stock outstanding as of December 14, 2001.
------------------------------
(1) Includes 41,449,796 shares held by various trusts and foundations (the
largest of which is the "Turner Children Trust" shown in this table) for
which Cal Turner, Jr. is a trustee; 727,587 shares held by Cal Turner,
Jr.'s wife; 21,403 shares held in Company retirement and deferred
compensation plans (IRA & 401(k)); direct ownership of 5,714,094 shares;
and 235,938 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days. Cal Turner, Jr. has
sole voting and investment power with respect to 5,971,435 shares of
Common Stock and shared voting and investment power with respect to
41,449,796 shares of Common Stock. Cal Turner, Jr. disclaims ownership of
the shares held by the various trusts and foundations, except to the
extent of his pecuniary interests.
(2) Includes 38,694,207 shares held by various trusts and foundations (the
largest of which is the "Turner Children Trust" shown in this table) for
which James Stephen Turner is a trustee; and 56,445 shares held by James
Stephen Turner's wife. James Stephen Turner has sole voting and investment
power with respect to 2,336,864 shares of Common Stock and shared voting
and investment power with respect to 38,694,207 shares of Common Stock.
James Stephen Turner disclaims ownership of the shares held by the various
trusts and foundations, except to the extent of his pecuniary interests.
(3) The co-trustees of the "Turner Children Trust" are Cal Turner, Jr. and
James Stephen Turner.
(4) According to a Form 13-F (effective September 30, 2001) filed by Capital
Research and Management Company on November 14, 2001, it has shared
investment power with respect to 31,133,000 shares of Common Stock, but
does not have sole or shared voting power over any of the shares of Common
Stock. The Company is unable to ascertain more recent information about
this entity's holdings.
(5) According to a Form 13-F (effective September 30, 2001) filed by
Wellington Management Company, LLP on November 14, 2001, it has sole
investment power with respect to 20,813,241 shares of common stock, shared
investment power with respect to 3,813,434 shares of Common Stock, sole
voting power with respect to 10,777,173 shares of Common Stock, shared
voting power with respect to 3,013,309 shares of Common Stock and no
voting power with regard to 10,836,193 shares of Common Stock. The Company
is unable to ascertain more recent information about this entity's
holdings.
97
Nominee/Executive Shares Beneficially Percent of
Officers Owned Shares Outstanding(1)
------------------------------------------------------------------------------
Dennis C. Bottorff 15,621 (2) *
Barbara L. Bowles 4,150 (3) *
James L. Clayton 478,623 (4) *
Reginald D. Dickson 59,512 (5) *
E. Gordon Gee 6,308 (6) *
John B. Holland 503,304 (7) *
Barbara M. Knuckles 20,664 (8) *
David M. Wilds 269,665 (9) *
William S. Wire, II 49,457 (10) *
Cal Turner, Jr. 48,148,818 (11) 14.9%
Brian Burr 25,500 (15) *
Bob Carpenter 1,627,142 (12,15) *
Tom Hartshorn 630,936 (13) *
Stonie O'Briant 328,614 (14) *
Earl Weissert 31,313 (15) *
All directors and 51,101,338 (16, 17) 15.8%
executive officers as
a group (20 persons)
------------------------------
(1) * Denotes less than 1% of class.
(2) Includes 13,669 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(3) Includes 3,150 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(4) Includes 67,738 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(5) Includes 39,726 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(6) Includes 6,308 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(7) Includes 33,476 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(8) Includes 13,938 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(9) Includes 67,738 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(10) Includes 33,476 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(11) Includes 235,938 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days, and also includes
shares beneficially owned as set forth under "Security Ownership of
Certain Beneficial Owners."
(12) Includes 656,628 shares issuable upon the exercise of outstanding options
or options exercisable within 60 days, and 494,449 shares for which Mr.
Carpenter has shared voting and investment rights as a Co-Trustee of the
Calister Turner, III 1994 Generation Skipping Trust.
(13) Includes 445,427 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(14) Includes 238,041 shares issuable upon the exercise of outstanding options
currently exercisable or exercisable within 60 days.
(15) Denotes that executive officer has left the Company.
(16) Includes 1,680,723 shares issuable upon the exercise of outstanding
options currently exercisable or exercisable within 60 days.
(17) Includes only those individuals who were directors or executive officers
as of December 14, 2001.
98
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John B. Holland, a director of the Company, was a director and
executive officer of Fruit of the Loom, Inc., a manufacturer of underwear and
other soft goods during 2000. In 2000, the Company purchased approximately $53.5
million in goods from Fruit of the Loom, Inc.
The Board of Directors has authorized the Company, pursuant to
the Company's By-laws and Section 48-18-504 and Section 48-18-507 of the
Tennessee Business Corporation Act, to advance to the Chairman and Chief
Executive Officer and to certain officers, employees and agents of the Company
reasonable expenses, including legal fees, for representation in connection with
legal proceedings and investigations arising out of the Company's April 30,
2001, announcement of its intention to restate certain previously released
financial information. Such advances have been made pursuant to a written
undertaking by each such person to repay in full the amounts advanced if it is
ultimately determined that such person is not entitled to indemnification by the
Company in connection with such legal proceedings and investigations. No
interest is being charged on these advances. Because the legal proceedings are
at any early stage, the Company cannot reasonably estimate the total amount of
expenses that may ultimately be advanced, either to any individual officer,
employee or agent or in the aggregate.
99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements: See Item 8.
(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, are inapplicable
or the information is included in the Consolidated Financial
Statements, and therefore, have been omitted.
(3) Exhibits: See Index to exhibits immediately following the
signature page.
(b) (1) A Current Report on Form 8-K, dated November 2, 2000, was
filed with the SEC in connection with an announcement about
October 2000 sales results and November 2000 sales expectations.
(2) A Current Report on Form 8-K, dated November 9, 2000, was filed
with the SEC in connection with an announcement about third
quarter earnings and the Company's expectations for financial
results for the 2000 fiscal year.
(3) A Current Report on Form 8-K, dated December 1, 2000, was filed
with the SEC in connection with an announcement about November
2000 sales results and December 2000 sales expectations.
(4) A Current Report on Form 8-K, dated January 4, 2001, was filed
with the SEC in connection with an announcement about December
2000 sales results and January 2001 sales expectations.
(5) A Current Report on Form 8-K, dated January 23, 2001, was filed
with the SEC in connection with an announcement about January
2001 sales results and the Company's updated earnings outlook for
the 2000 fiscal year.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DOLLAR GENERAL CORPORATION
Date: January 14, 2002 By: /s/ Cal Turner, Jr.
---------------------------------
CAL TURNER, JR., CHIEF EXECUTIVE
OFFICER
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Cal Turner, Jr. Chairman and Chief Executive January 14, 2002
------------------- Officer (Principal Executive
CAL TURNER, JR. Officer)
/s/ James J. Hagan Executive Vice President and January 14, 2002
------------------ Chief Financial Officer
JAMES J. HAGAN (Principal Financial and Accounting
Officer)
/s/ Dennis C. Bottorff Director January 14, 2002
----------------------
DENNIS C. BOTTORFF
/s/ Barbara L. Bowles Director January 14, 2002
---------------------
BARBARA L. BOWLES
/s/ James L. Clayton Director January 14, 2002
--------------------
JAMES L. CLAYTON
/s/ Reginald D. Dickson Director January 14, 2002
------------------------
REGINALD D. DICKSON
/s/ E. Gordon Gee Director January 14, 2002
-----------------
E. GORDON GEE
/s/ John B. Holland Director January 14, 2002
-------------------
JOHN B. HOLLAND
/s/ Barbara M. Knuckles Director January 14, 2002
-----------------------
BARBARA M. KNUCKLES
/s/ David M. Wilds Director January 14, 2002
------------------
DAVID M. WILDS
/s/ William S. Wire, II Director January 14, 2002
-----------------------
WILLIAM S. WIRE, II
101
INDEX TO EXHIBITS
3.1 Restated Charter (incorporated by reference to the Company's
Current Report on Form 8-K filed February 29, 2000).
3.2 Bylaws (incorporated by reference to the Company's Proxy
Statement for the June 1, 1998, Annual Meeting of Shareholders).
4.1 Sections 7, 8, 9, 10 and 12 of the Company's Restated Charter
(included in Exhibit 3.1).
4.2 Rights Agreement dated as of February 29, 2000, between Dollar
General Corporation and Registrar and Transfer Company
(incorporated by reference to the Company's Current Report on
Form 8-K filed February 29, 2000).
10.1 Indenture, dated as of June 21, 2000, by and among Dollar General
Corporation, the guarantors named therein, as guarantors, and
First Union National Bank, as trustee (incorporated by reference
to the Company's Registration Statement on Form S-4 filed August
1, 2000), as amended by the First Supplemental Indenture, dated
as of July 28, 2000, by and among Dollar General Corporation, the
guarantors named therein, as guarantors, and First Union National
Bank, as trustee.
10.2 Master Agreement, dated as of June 11, 1999, by and among Dollar
General Corporation; Certain Subsidiaries of Dollar General
Corporation; Atlantic Financial Group, Ltd.; Three Pillars
Funding Corporation; Certain Financial Institutions Parties
Hereto; SunTrust Bank, Nashville N.A.; First Union National Bank,
Bank of American National Trust and Savings Bank; The First
National Bank of Chicago and Wachovia Bank, N.A.; and SunTrust
Equitable Securities Corporation (incorporated by reference to
the Company's Amended Quarterly Report for the quarter ended July
30, 1999, on Form 10-Q/A filed April 25, 2000).
10.3 Master Lease Agreement, dated as of June 11, 1999, between
Atlantic Financial Group, Ltd. and Dollar General Corporation and
Certain Subsidiaries of Dollar General Corporation (incorporated
by reference to the Company's Amended Quarterly Report for the
quarter ended July 30, 1999, on Form 10-Q/A filed April 25,
2000).
10.4 Guaranty Agreement dated as of June 11, 1999, by Dollar General
Corporation (incorporated by reference to the Company's Amended
Quarterly Report for the quarter ended July 30, 1999, on Form
10-Q/A filed April 25, 2000).
10.5 Subsidiary Guarantee dated as of June 11, 1999, by Dolgencorp,
Inc., Dolgencorp of Texas, Inc., Dade Lease Management, Inc.,
Dollar General Financial, Inc. and Dollar General Partners
102
(incorporated by reference to the Company's Amended Quarterly
Report for the quarter ended July 30, 1999, on Form 10-Q/A filed
April 25, 2000).
10.6 Credit Agreement dated as of September 2, 1997, by and among
Dollar General Corporation and SunTrust Bank, Nashville, N.A.
(incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1997).
10.7 Master Agreement dated as of September 2, 1997, by and among
Dollar General Corporation, Certain Subsidiaries of Dollar
General Corporation, Atlantic Financial Group, Ltd., Certain
Financial Institutions Parties hereto at SunTrust Bank,
Nashville, N.A. (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 31,
1997).
10.8 Dollar General Corporation 1988 Outside Directors' Stock Option
Plan, as amended, (incorporated herein by reference to the
Company's Proxy Statement for the June 3, 1996, Annual Meeting of
Stockholders).
10.9 Dollar General Corporation 1989 Employee Stock Incentive Plan, as
amended (incorporated by reference to the Company's Proxy
Statement for the June 13, 1989, Annual Meeting of Stockholders).
10.10 1993 Employee Stock Incentive Plan (incorporated herein by
reference to the Company's Proxy Statement for the June 7, 1993,
Annual Meeting of Stockholders).
10.11 1993 Outside Directors Stock Option Plan (incorporated herein by
reference to the Company's Proxy Statement for the June 7, 1993,
Annual Meeting of Stockholders).
10.12 1995 Employee Stock Incentive Plan (incorporated herein by
reference to the Company's Proxy Statement for the June 5, 1995,
Annual Meeting of Stockholders).
10.13 1995 Outside Directors Stock Option Plan (incorporated herein by
reference to the Company's Proxy Statement for the June 5, 1995,
Annual Meeting of Stockholders).
10.14 1998 Stock Incentive Plan (incorporated herein by reference to
the Company's Proxy Statement for the June 5, 2000, Annual
Meeting of Shareholders).
103
10.15 Dollar General Corporation Supplemental Executive Retirement Plan
and Compensation Deferral Plan (incorporated by reference to the
Company's Registration Statement on Form S-8 filed December 21,
1999).
10.16 Dollar General Corporation Deferred Compensation Plan for
Non-Employee Directors as amended and restated effective November
6, 2000.
10.17 Sale and Purchase Agreement, dated as of June 1, 2000, among
Dollar General Corporation as Lessee and Seller, FU/DG Fulton,
LLC, as Lessor, and First Union Commercial Corporation, as Head
Lessor.
10.18. Sale and Purchase Agreement, dated as of June 1, 2000, among
Dollar General Corporation as Lessee and Seller, FU/DG Indianola,
LLC, as Lessor, and First Union Commercial Corporation, as Head
Lessor.
10.19 Lease Agreement, dated as of June 1, 2000, between FU/DG Fulton
LLC, as Lessor and Dollar General Corporation, as Lessee.
10.20 Lease Agreement, dated as of June 1, 2000, between FU/DG
Indianola, LLC, as Lessor and Dollar General Corporation, as
Lessee.
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
104